In Corey Booker’s now infamous State of the city speech, the mayor spoke about financial shortfalls that the city is facing.
“The city also faces critical financial shortfalls, and to fill them Booker said all options are on the table this year, except layoffs.” See Full Article
If all options are on the table then I will take this opportunity to put forth an option – repeal rent regulation.
Yes – that is right repeal rent regulation. How would repealing rent regulation impact the cities financial situation? First off the cities biggest source of revenue is real estate taxes. Of the taxes collected from commercial real estate real estate taxes collected on apartment buildings accouts for barely more than 15% of the cities revenue from real estate taxation. Approximately 77% comes from commercial property and less than 8% comes from industrial property. With an overwhelming percentage of revenue coming from commercial properites there is little blood left from that stone and the limited quantity of industrial property makes it difficulty to provide any significant impact. This leaves apartment and multifamily properties as an obvious opportunity.
So why rent regulation? Rent regulation is the most direct, immediate and significant means for the city to increase its tax base.
Rent regulation keeps property values artificially low for a number of reasons.
- Rent regulation limits the profit margin a property owner can generate from a building thereby restricting the revenue resulting in a lower economic value for the property.
- Rent regulations control the imporvements a property owner can do to their property and dictates how they can recoup these costs.
- Rent regulations dictate the amount of increase an owner can seek when renewing leases with tenants in place or for vacant units.
Eliminating these restrictions will immediately and signficantly boost the value of multifamily properties in the city and thereby boost tax revenues.
- Owners who are free to achieve an unrestricted profit margin are incented to better manage their properties to reduce operating expenses, inefficient systems and more effective management and maintenance. This freedom also attracts the best class of property owners, those who know most effectively and efficiently manage a property and understand that happy tenants make for a property that is easy to manage.
- Owners who are free to improve their properties with no restriction on the scope of work or method of recouping the costs will invest in the housing stock of the city of Newark making the property itself more valuable and livable.
- Owners who are free to set their rents based upon market forces will do so. They will balance the risk of top of the market rents with benefits stable tenancy to achieve minimal vacancy at the highest revenue. This will provide a strong incentive for the creation of new housing stock at all levels and price points.
By making the ownership of housting stock in Newark a profitable endeavor property values will significantly increase. Owners and investors will want to be in Newark to take advantage of these opportunities. Owners will invest in their properties to make them the best they can be.
The time to do this is now, not just for the sake of the financial crisis alone but for the opportunity neighboring cities are presenting. New York State is about to pass a series of bills that will turn back many of the freedoms that have attributed to the cities gains in housing over the past 20 years. This gives the city of Newark the opportunity to juxtapose itself, attract all of those NYC multifamily owners and investors that will be looking to more attractive environs to invest their money and ply their trade. See this blog post by Robert Knakal, Chairman of Massey Knakal (just so happens to be my firm) for more information on the self destructive route NYC is flirting with.
There are plenty of articles on the internet that go deeper into the benefits of deregulation and examples throughout the past quarter century. What I have put forth here is a direct response to the cities pending budget crisis trying not to stray into the other advantages of freeing owners to do their business.