Massey Knakal's Bob Knakal Answers Your Questions

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Massey Knakal chairman Bob Knakal was the guest of honor for a recent Curbed University open thread. We passed your questions on to him; read on for his answers. (And please do let us know if you have a guest suggestion for a future open thread.)

Bob, you have spoken about the need for 'means testing' for Rent Stabilization in the past. This week, the DHCR said they "do not investigate tax fraud" in reference to the 737 Park/Cohen case. I do not understand why government agencies cannot work together here. Is there any sort of explanation? Has there ever been any talks of consequences for people who break RS rules, or are they just faced with the threat of eviction? What is someone to lose by trying to sublet their apartment for a profit?

You bring up some great points here. the fact is there are no consequences for tenants who are rule breakers other than eviction so why not try to game the system? The fact is that rent regulation benefits are a public subsidy just like welfare or food stamps. However, with rent regulation, it is the private sector that foots the bill. Those footing the bill are the owners of the buildings the rent regulated tenants are in and all of the other non-regulated residents of New York who pay higher free market rents given the supply constraints caused by regulation and the higher taxes paid as regulated properties are not paying their "fair share". The supply constraint is very harmful to the market as regulation creates a massive misallocation of our housing stock. Little old ladies stay living in 4 bedroom apartments by themselves and family of 6 stay in a two bedroom as they both want to take advantage of their below market rents. The supply constraint also provide fewer options for folks who are coming to NY to look for an apartment as they have about 1 million less choices than they would in the absence of regulation as regulated tenants rarely move.

The system should have severe penalties for tenants who cheat. Under the current system, if a tenant is cheating and the property owner suspects it, or even knows for sure, they must bring a legal action to get the tenant out. In the almost 30 years I have been active in the New York City real estate market, I have never seen a cheating tenant walk into a management office and say, "I am illegally subletting my apartment so here are my keys". I have also never seen one say, "My regulated apartment is actually not my primary residence so I am moving out." The only way an owner can deal with these tenants is to sue them and then the owner is hit with a charge of harassment.

A very simple solution to this problem is to have all regulated tenants go through a qualification process. All tenants receiving Section 8 benefits must do this. All tenants living in the affordable component of 80/20 buildings must do this. If all regulated tenants were forced to qualify, the amount of court cases would be reduced considerably and there would be substantially less cheating going on by tenants. The way the system works now, cheating tenants are like shoplifters who get caught after years and when caught either have to give up only the most recent stuff they stole or have to promise they will never do it again. Imagine if that was how our criminal court system worked. There are severe penalties for owners if they don't play by the rules. There should be similar penalties for tenants. The problem is that it is not in any politician's interest to do what is right here. They only care about votes and there are more tenants who vote than property owners.

Not until all non-regulated residents (who outnumber regulated residents by 2 to 1) realize that they are subsidizing regulated residents, in the form of higher free market rents and higher real estate taxes, is there any chance for substantive changes in property owner's favor to occur.

Bob, has anyone used the religious facility exemption to get rid of rs tenants lately? Looks like the non- MD conversion trick is increasing.

That is a good question. I am not aware of anyone using this exemption to get rid of regulated tenants (I did not even know the exemption existed).

What are you seeing out there right now in the multi-family market (trends, popular neighborhoods, etc.)?

The multifamily market remains the sector with the most demand in New York City. The number of sales thus far in 2013 is down from 2012 totals but this was expected. The threat of higher capital gains taxes throughout 2012 accelerated the sales process for many sellers who would have sold in early 2013. We saw record levels of sales of all types of properties in 4Q12, multifamily properties among them. To see a slowdown so far this year is a by-product of this dynamic.

With regard to value, we continue to see cap rate compression as lending rates continue to drop with five and ten year fixed rate mortgages consistently pricing well below 3 percent for multifamily assets. This is leading investors to drop their yield expectation which drops cap rates, exerting upward pressure on values.
With respect to hot neighborhoods, what stands out is how on fire so many neighborhoods in Brooklyn have become. Rents in new construction in Park Slope, for example, are in the $55 to $60 per square foot range, rivaling rent levels in some Manhattan neighborhoods. We expect this trend to continue as it is increasingly cool to live and play in Brooklyn.

We are also seeing land values soaring as developers believe the end user market, for both rentals and condos, two to three years from now is going to be substantially better than it is today. This optimistic perspective bodes well for the future.
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