August 3, 2003
A Landlord's Lot Is Sometimes Not an Easy One

It was a blistering Saturday afternoon in late August, and while the rest of Manhattan was relaxing at a beach somewhere, I was mopping up water as it spurted from a hole in the second-floor ceiling of a small apartment building in Murray Hill. The tenants were away, and by the time I had gotten there the water had had plenty of time to ruin a lovely parquet floor, while also taking down part of the ceiling. Moreover, every emergency plumbing service was booked.

As you can probably tell, I am a real estate tycoon. Or at least that is how I would be loosely categorized in the trench warfare between landlord and tenant advocates over the state's rent control law, the latest round of which was recently concluded in Albany. Known officially as the Rent Regulation Reform Act of 1997, the statute was renewed on June 20 for eight years, but only after the pro-landlord Senate had outmaneuvered the pro-tenant Assembly to strengthen the law.

So virulently polarized are the two camps that landlords are routinely portrayed as fat cats, with unlimited tracts of income property. But Roberta Bernstein, president of the Small Property Owners of New York, estimates that more than three out of five New York landlords own only one building, and around half of all buildings have 15 or fewer tenants. This part of the city's housing market has received little attention, and what follows is a modest effort to fill the void.

As a journalist and former English professor, I had few qualifications for running an apartment building, unless you count the one-bedroom condominium my family and I bought as a rental unit in 1993 in a Midtown building. We had a small but flourishing real estate business in California, and in 1997, with my guileless encouragement, we decided to buy a whole apartment building in Manhattan.

A broker found us a converted Victorian town house in Murray Hill. It had four stabilized apartments and two floors delivered vacant, and the owners accepted our offer of $885,000.

A New York closing cannot be very traumatic for the likes of a Donald Trump or Harry Macklowe, but for us, it was as brutal as a visit from Tony Soprano. Actually, I cannot think of any TV show or movie that resembles what happened on May 2, 1997 in a law office on Broadway, although "The Night of the Living Dead" comes close.

Lawyers, bankers and a title company representative sat around a large conference table eyeing us carnivorously and uncapping mental ketchup bottles. Although we had borrowed an extra $40,000 to cover our closing costs, our actual tab came to $60,000. We had to make up the difference with personal checks and then, demeaningly, scramble to cover them with cash advances on credit cards.

When my shellshocked family returned to California the next day, my mother's last comforting words were: "We got you a piece of the rock. Now try not to squander our investment."

Behind her tough language, I knew, was a desire that I should cultivate more practical aptitudes than the ability to scan English verse or explain the Romantic Fallacy. For me, it had to be: Goodbye, Keats and Shelley; hello, Pratt & Lambert.

So ignorant was I of New York real estate that I was barely aware of the Great Landlord-Tenant War of 1997, which was then raging. The Senate majority leader, Joseph L. Bruno, had pledged to end rent regulation and the Assembly speaker, Sheldon Silver, in alliance with various tenant advocacy organizations, had sworn to preserve it.

The present law began as rent control during World War II and was amended many times. The biggest change came in 1969, when rent stabilization was introduced, eventually supplanting most of the rent-control system. In the spring of 2002, 1.07 million apartments enjoyed rent-regulated status, according to the census bureau, and most tenants regard this protection as a birthright the Founding Fathers unaccountably omitted from the Constitution.

My own situation was unusual. While I now co-owned a rent-stabilized building, I lived in a stabilized apartment in Greenwich Village. I still do. Thus, I both won and lost when the rent guidelines were renewed in the session of the State Legislature that ended in June.

Starting Out
Little in Common With Industry Moguls

In my rookie season as a landlord, I quickly discovered I had little kinship with the barons of the industry, who had management companies to supervise their buildings, with an on-site superintendent and several porters for each address. Even small buildings need a super, and while big-league landlords can afford a factotum, someone exceptionally handy who saves them money on repairs, their small-time counterparts cannot.

In my case, I hired a cheerful, obliging native of the Balkans who was already in charge of several buildings on the block and who had a solution for every problem: leaks ("You need plumber."), shorts ("Better get electrician.") and faulty deadbolts ("You call locksmith.").

With no underlings to serve as a buffer, I was soon the recipient of frequent calls and messages about clogged drains, broken light switches, loose bathroom tile and roach infestation. This was my real moment of truth. I had joined the Temple of Moloch, but did I have the makings of a New York landlord?

For inspiration, I looked to men like a well-known landlord who at the time was allegedly making life miserable for his unwanted rent-regulated tenants in a Park Avenue building. Then I looked inside myself. Big mistake. Where I hoped to find measureless caverns of self-interest, I found instead a soft, squishy belief that all tenants, stabilized or not, deserved the services and repairs mandated in their leases.

I had no choice but to be a hands-on owner, and a whole new breed of workers — painters, roofers, carpenters — burst into my life. These were men with dilapidated trucks or vans and plentiful excuses for why they were always late. ("Never seen the tunnel so backed up." "Truck broke down two blocks from the Queensboro, no kidding." "Can't believe I forgot my RotoHammer.")

Like all landlords, large and small, I soon found that in any apartment house, plumbing is by far the biggest source of grief. A handyman can replace a rotted out washer or install a new shower head, but if a pipe ruptures in a wall or ceiling, you have to swallow hard and send for . . . a licensed plumber.

Not that anyone of this description will ever actually show up: expect a "plumber's assistant" instead. However small the job, this surrogate is guaranteed to hand you a bill that will buckle your knees. But you must remember that you are paying not only for the work he did but for the boss's overhead — his insurance, payroll tax, office supplies, coffee, bagels, etc.

All plumbing breakdowns are potentially serious, but a landlord's most perilous dramas occur in the boiler room. Our boiler, though brand new, was so erratic I nicknamed it the White Devil. As if in response, it inflicted its own brand of Jacobean tragedy, shutting down more than once in the dead of winter.

People who see all landlords as creatures of insatiable greed do not understand that for thousands of small-building owners obscene profits are not in the cards. We are more vulnerable to a sudden jump in oil prices or the turbulent effects of utility deregulation than the industry goliaths.

Meanwhile, the growth of rent on stabilized units is in no way commensurate with expenses. During my tenure as a landlord, rent renewal increases — on average, 4 percent for a two-year lease, 2 percent for one year — have remained minuscule and effectively evaporate when the newly adjusted real estate tax bill arrives.

In June, the Rent Guidelines Board, the city agency that sets the increases, lifted them to 7.5 percent and 4.5 percent, respectively. But a year that began with Mayor Michael R. Bloomberg confiscating an additional 18.5 percent in real estate taxes is not likely to end with significantly more profits in landlords' pockets.

For the small-building owner, a further barrier against prodigal wealth is debt service. Your larger brethren will, of course, face monthly mortgage payments that dwarf your own, but, then, so do their assets. Moreover, banks cut their biggest customers the best deals.

If you are out-of-town rubes like us, however, with newly hired and inadequate counsel, you may soon find yourself locked into a penal loan agreement. Our lender, a major player in New York real estate, feigned generosity by requesting only a 10 percent down payment, then hedged its bets by requiring liens on two of our other properties. The interest rate, 9.25 percent, was so high that it might as well have been called "the vig."

Every clause in our agreement was a windowless cell, and any request to be released from one was met with the same response: "You signed an agreement . . . you signed an agreement." One of the clauses compelled us to turn the first and second floors of the building into a duplex and get at least $4,000 in rent for the new space. (Small apartment buildings, I learned, are more valuable if, by virtue of at least one luxurious unit, they have the potential to be owner-occupied.)

I wrote a polite letter to the bank president suggesting that it made more sense to rent two floor-throughs at $2,000 to $2,500 apiece than to try to squeeze double that amount from one duplex. When the answer eventually arrived from Mount Olympus, it read, "You signed an agreement."

The renovation went forward, took several months and eventually cost more than $100,000. We even added a sunroom. While Fontainebleau-on-37th-Street was under construction, we lost the income on two floors, and I had to make up the difference between $4,134 in rental income and a mortgage payment just under $10,000.

When our creation was finally completed, we were fortunate to find a high-end couple who liked the results and could afford the rent. Augmented by rent renewal increases, the monthly rent roll climbed to $10,106, which was divided as follows: the bank (approximately $9,650), the super's salary ($300), fuel and utilities ($326), repairs ($442) and general maintenance ($205). Everything else was mine to keep. Everything.

My personal woes notwithstanding, residential real estate in New York is a lucrative investment. Appreciation, equity build-up and copious tax deductions are major economic blessings for a landlord. In six years, our $885,000 building has about doubled in value to $1.75 million, while permitting an annual depreciation expense of roughly $34,000.

Although stabilized tenants cling to their apartments, when one of them is vacated state rent laws entitle landlords to raise rents in three primary ways: a vacancy increase of 20 percent for a new tenant's two-year lease (a bit less for a one-year lease); one-fortieth per month of the cost of any improvements, and a "longevity bonus" for longtime residents (calculated at six-tenths of 1 percent times the tenant's last legal rent multiplied by the number of years of residency beyond eight).

Only once did I have a tenant vacate a stabilized apartment, but I was then able to raise the rent on his fifth-floor walkup studio from $784 to $1,277. While this space, like many apartments, might never command $2,000 a month, more desirable units can be lifted to the deregulation level with comparative ease. (Apartments renting for $2,000 a month are automatically deregulated if they are vacant. Occupied apartments whose rent reaches that figure can be deregulated if the income of the tenants has been $175,000 or more for two years.)

The consequence is a shrinkage of what Michael McKee, associate director of New York Tenants and Neighbors Coalition, calls "affordable housing for ordinary people." The retention of the $2,000 threshold in the new law, rather than scrapping what is called high rent vacancy decontrol entirely as urged by Mr. McKee and Mr. Silver, was seen as a victory for landlords.

Without repeal of vacancy decontrol, Mr. McKee believes, rent regulation is doomed, a view disputed by others. Personally, I favor retention of rent regulation if only because I believe its abolition would drive New York's mostly penurious intellectual and artistic community, so vital to our municipal character, out of town. Hearing these views, a fellow landlord once called me a "traitor to my class."

Landlord advocates like Ms. Bernstein prefer to focus on one issue, operating expenses, particularly unexpected lurches in the cost of insurance and fuel. But a report by the city's Rent Guidelines Board, the "2003 Income and Expense Study," covering 2001 (the most recent year for which figures are available), concludes that net operating income — gross rental income minus expenses but exclusive of debt service — was 44 percent.

"What other industry" Mr. McKee asks as rhetorically as possible, "could even begin to think about a return of 44 cents on the dollar?" Although the board report excludes buildings with 10 units or fewer, there is little reason to think their arithmetic would be any different.

A Way Out
With Rates Falling, Refinancing Beckons

For me, as the months and years ground on without change, it became clear that deliverance could take only one form: refinancing. By 1999, interest rates had come down, and my prepayment penalty had dropped from outrageous to merely unreasonable. Surely, I thought, some nice little savings and loan would rescue me from the financial boulder I was pinned underneath.

Hence, I set about shopping our $800,000 mortgage to every imaginable lender. Some did not do deals under a million; others did not finance buildings with more than four apartments. My next lesson in real estate was that even banks that had a "product" intended for you would offer only a 70 to 75 percent loan-to-value package, then mercilessly under-appraise the property. Simultaneously, many of them will shake you down for every preliminary fee they can, with not a penny refunded if the loan is aborted.

I began my tale in media res, so perhaps it is time to dissolve back to that sweltering August afternoon, now evening, as I stood in the heartbreaking, disfigured beauty of the parlor room. It was around 10:50 when a hulking young man arrived, with the standard after-hours plumber's greeting: "Hi, I'm Frank, and I have to charge you the emergency rate."

As the Meter Runs
Plumber Sinks Budget for Months to Come

I had no choice but to assent, and Frank began sawing out a foot or two of badly corroded galvanized pipe, while raving about "Rush Hour II," the movie he had just seen when his dispatcher beeped him. For the next hour, Frank critiqued numerous other summer flicks as he fitted a brand new section of cast-iron pipe into place and attached a metal band.

The meter in my head told me we were probably up around $700 by now. But when Frank checked the line, it was still not clear. Uh-oh. The going rate for clearing a stoppage before sundown on a weekday was $100 to $120, so on a Saturday night, it could cost . . . mmm, maybe it was better not to know.

A little after midnight, I waited in my vestibule while Frank wrote up my invoice, including $300 for the snaking. Well, I thought, it took him almost 15 minutes. The final tab was $1,028, which capsized my budget for months to come.

I trudged home, knowing the crisis of the parlor room was far from over. Looking back, I wonder if it could be a narrative series, like the Patrick O'Brien sea novels. You know, "the adventure continues": how my insurance company dispatched Karl, the ninja claims adjuster, who — Pow! Thwack! Crunch! — annihilated my compensation request; how I found a Russian contractor in a discount-coupon packet who was willing to work on Labor Day weekend; how his hearty crew, smoking like chimneys and cursing in their native tongue, rebuilt the parlor as meticulously as if it were the Winter Palace; and so forth.

I might have continued to be the poorest real estate tycoon in town forever, but one day, in a surly, kick-the-cat mood, I flipped open the classified directory and picked a bank at random, intent on administering a nasty browbeating to someone, anyone. My victim was Eastbank, a small Chinese-American lender, or more specifically, the pleasant-sounding Asian woman who took my call.

By now our loan was down to $770,000, and I practically snarled, "I don't suppose you can give us that much."

"Yes, we can," she replied imperturbably.

I pummeled her again: "But, of course, you don't do multifamily dwellings, do you?"

"No, we do," she answered.

Her courtesy was so unrelenting it took a real effort to remain snide. "Yeah, but what kind of terms?"

Her response: "We can offer you a five-year balloon, fixed, at 7.5 percent, with an option to renew, or an adjustable-rate loan."

When she told me the current adjustable rate, 5.75 percent, my rancor dissipated instantly, and I clung tightly to the sofa, afraid I might levitate. A new loan at this rate would take my payments down to an ecstatically low level. The closing costs she subsequently itemized — no application fee; $1,500 for an appraisal; one point, meaning 1 percent of the loan for the bank — only intensified my euphoria. In my feverish gratitude, I made immediate plans to visit China, learn the language and, if possible, marry the loan officer. My next closing promised to be pure bliss. It was.

A healthy bank account certainly does a lot to relieve a landlord's travails. Today, repairs and upkeep on the building are occasionally still costly, but no longer traumatic. I am now able to pay my mortgage by automatic deduction rather than my previous method — sprinting desperately into the bank 20 minutes before the deadline with my check outstretched. Also, it no longer matters that at least three of my four stabilized tenants will apparently not be leaving until they have to be assisted to the door by paramedics.

I know I will never be a genuine tycoon, my perspective on the city defined by the smoked glass of a limousine. Frankly, I prefer the view from the vestibule anyway. *

(Edited by normaldude at 1:49 am on Aug. 2, 2003)