Housing Complex

New York Bankruptcy Case Could Undercut D.C. Rent Control

The Kennedy-Warren building near the National Zoo has been the site of a big rent-control battle.

The Kennedy-Warren building near the National Zoo has been the site of a rent-control battle.

When a 79-year-old woman living in New York's East Village found herself buried in debt and filed for bankruptcy, she probably couldn't have imagined that her story might have implications for affordable housing as far away as D.C. And yet as the United States Court of Appeals for the Second Circuit considers her case, that's exactly what some lawyers involved with the case say might happen.

The New York Times tells the tale today of Mary Veronica Santiago, who's lived in her rent-stabilized apartment for 50 years. After her husband died and she fell behind on her bills and filed for bankruptcy, the bankruptcy trustee in charge of taking control of her assets accepted an offer from the landlord to turn her rent-controlled lease into one. Rather than dodging her bills because of her lack of assets, she could now find herself out of rent-stabilized housing, or at least unable to pass it on to her son, as she'd hoped to do.

A bankruptcy court and then a federal district court ruled that her rent-stabilized lease could indeed be treated as an asset, just like a house or a car. If the appeals court upholds those decisions, the Times says, it "poses a major risk to ... the millions of other New Yorkers who live in rent-stabilized apartments."

But there's reason to believe the ripples could be felt beyond New York's borders, including in D.C.'s housing market.

"I think this case is likely to set a precedent that will be followed nationally on this problem," says Ronald Mann, the Columbia University law professor and attorney who argued Santiago's case before the appeals court.

The majority of D.C. rental housing is rent controlled; the exceptions are units built after 1975, units owned by landlords who rent out fewer than five units (or who claim special hardship), and government-subsidized housing. In the year ending June 30, 754 D.C. residents filed for "non-business" bankruptcy. That means that if the New York case is upheld and becomes a precedent for D.C., hundreds of residents here could see their rent control put at risk each year.

Joel Cohn, the legislative director at the D.C. Office of the Tenant Advocate, says it's not entirely clear whether a ruling in this case would automatically apply to the District, given certain details of the case, like the involvement of succession rights, which don't apply to D.C. rent control. "It kind of depends on if it gets decided in the trustee’s favor, and if so, how it gets decided in the trustee’s favor," he says.

But a blanket ruling in support of the idea of treating rent control as an asset could severely undermine rent control here. "If the court were to say, 'Sure, no problem,' and not attach any caveats, then that would be very bad, and it would be bad beyond New York," says Cohn. "It would be bad for D.C. and other places with rent control."

Even if the ruling doesn't apply directly to D.C., given that the law in question is a New York law (though D.C.'s regulations are similar), it could be seen by local courts as a precedent—or by landlords as a signal that they can terminate rent-controlled leases of bankrupt tenants, says Kathleen Cully, a pro bono lawyer representing Santiago.

"I think it could easily be seen as precedent," she says. "I could even more see it as encouragement to landlords."

Photo by Darrow Montgomery

  • pwc

    This is a 79-year-old woman living in a two bedroom apartment in the most expensive real estate market in the country. She's paying Arkansas prices for a Manhattan apartment. This would not be "bad for D.C. and other places with rent control." It would be bad for those who currently enjoy low rent in high rent places. That's not the majority.

    At some point, we need to accept the fact that rent control benefits the few (those who managed to score apartments long ago) at the expense of the many (new residents and the young). As a young person who pays market rent on a low-wage salary, I detest the fact that these people are able to score sweetheart deals on apartments. It pushes up prices for me and my cohort.

    Sad as it may be, this woman should not be allowed to keep her apartment. Anything that chips away at rent control is a good thing. It's basic economics--cap prices and decrease supply.

  • Dave

    What I don't get is why the bankruptcy trustee would accept such a lowball offer. I don't really mind having rent-controlled leases counted as assets, so long as they are valued properly. A two-bedroom apartment in Tompkins Sq Park would rent for, what, $3000 without rent control? So the landlord's paying only $23,000 to get an extra $27,500 or so PER YEAR. Which is a value of maybe $400,000.

    If the landlord paid her the actual value of her lease, then sure, I'm fine with having the leases counted as assets. Ms. Santiago gets $375k to work with after her bankruptcy proceeding, which is enough for her to move. The problem is with allowing ONLY the landlord to make an offer on that asset, which means the landlord can lowball that offer.

  • Typical DC BS

    Rent control is socialist nonsense. Telling someone else what they can charge for their assets is Dumocratic nannyism at it's worst. NYC and DC are absolutely ridiculous. Wish some property owner would sue to overturn these laws.

  • peter rosenstein

    Rent control and rent stabilization in New York are the only thing that allowed many middle class people to remain in the City- particularly Manhattan. In DC is has the same importance. My problem has always been with allowing an apartment to be inherited. I think once the person in it leaves their children - unless those children have been full-time tenants in the apartment- shouldn't be able to assume the lease.

  • Paxton Helms

    You write:

    "It would be bad for those who currently enjoy low rent in high rent places. That's not the majority."

    Well, then why have rent control? It doesn't sound like it's needed.

    P.H.

  • http://www.facebook.com/nycrenters NY Renters Alliance

    What makes her lease valuable is that she's paying roughly 20% of market and can pass the lease down to her son, who, presumably, will continue to renew it for the next 30+ years of his life. The net present value of this lease is on the order of $750k, which means that it is 3/4ths of the value of the apartment.

    My understanding is that DC leases, even the rent control ones, never really get this bad, as DC's formula tracks landlords' cost inflation better. As a result, the leases will never be so valuable as to be litigated over for years in bankruptcy court

  • Paxton Helms

    NY Renters Alliance,

    Excellent point. I had never thought of this in terms of NPV / DCF.

    This also raises the question, though: should we be taking $750,000 out of the hands of a single private citizen (or LLC) that had the bad luck to get caught in a rent control contract and just hand it over to one or two other people?

    If you want subsidized housing (and I don't) then spread the cost around by making all taxpayers pay for it via some kind of cash subsidy. New York City's person-to-person wealth transfer is sickening, appalling, and unconscionable.

    P.H.

  • Hillman

    Rent control and the very pro tenant laws in DC are reasons why so many apartments have been sold as condos.

    Why should a landlord put up with very small profits no matter how much labor he has to put into the property, when he can just flip them as condos?

    There have been several studies saying very strong rent control decreases the availability of not only very affordable apartments, but also midrange affordability apartments.

    And DC doesn't have an affordable housing problem. We have a crime problem that makes countless affordable apartments in NE and SE and PG County undesirable.

    That's not the same has having no affordable housing.

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