How New York’s preferential rent loophole is unfairly used against tenants

While there are some protections in place to ensure that New York’s renters have access to fair housing, there are also loopholes that can undo those protections if they’re interpreted the wrong way, or utilized by unscrupulous landlords.

Take, for instance, “preferential rent”: landlords who manage rent-stabilized apartments have the option of offering units to tenants for a price that’s lower than the legal regulated rent, which is determined by the apartment’s rental history. In theory, this sounds like a good idea; renters get a cheaper apartment, and landlords may be able to keep apartments full for longer, so everyone wins, right?

Not exactly: According to the Metropolitan Council on Housing, “in most cases the preferential rent can be revoked whenever the lease is renewed, and the landlord can start charging the higher ‘legal regulated rent’ plus other allowable increases.”

Or, as an in-depth ProPublica report puts it, “Increases in preferential rents aren’t subject to city-set limits governing other rent-stabilized apartments. Landlords can revoke the preferential rates, and hike rents to the legal maximum, whenever leases come up for renewal. That can mean spikes of hundreds or even thousands of dollars.”

ProPublica’s report looks at the human impact of this loophole, chronicling the challenges faced by several tenants who’ve experienced huge, unexpected rent increases as a result of landlords revoking their preferential rent. And according to ProPublica, “tenant advocates say preferential rents are being used as a tool to foster displacement and gentrification.”

In the case of one family, who lived in an apartment in Prospect Park South, the landlord initially offered preferential rent of $1,375/month in 2010, and subsequently increased the family’s rent according to the guidelines set for rent-stabilized apartments, eventually settling at $1,494.

But in 2015—a year in which the Rent Guidelines Board voted to not impose an increase on one-year leases—their landlord revoked the preferential rent credit and raised the rent to the maximum amount allowed by law: $2,065. The landlord claimed it was done after several instances of non-payment, which the tenants dispute; but ultimately, it led to the tenants leaving the apartment they’d occupied for more than five years.

That’s just one example, but according to ProPublica, the number of leases offering preferential rents is increasing: more than 250,000 of the city’s approximately 610,000 rent-stabilized units in 2015 were offered at a preferential rent, rather than following the traditional rent-stabilization rules.

“It sort of defeats the whole purpose of rent stabilization, which is to give the tenants some security,” Ed Josephson, director of litigation for Legal Services NYC, told ProPublica. The MCH backs up that assertion: “Preferential rents are sometimes offered as a favor to tenants, but other times they are used to hide that a landlord is registering an illegally high rent for that apartment with the state,” it states.

As ProPublica points out, the loophole allowing landlords to revoke preferential rent when a lease renewal is up is relatively new; it didn’t exist prior to 2003. But as the report explains:

Just before midnight on June 19, 2003, a bill renewing state rent laws suddenly landed on the New York Senate floor. A message from then-Gov. George Pataki, a Republican, asked lawmakers to pass it immediately before ending the legislative session — even though the Assembly hadn’t even seen it. … John Allen, then legal counsel for the Senate Democrats, had just enough time to skim the bill and find the provision allowing owners to hike preferential rents to legal maximums upon lease renewal. He explained its impact to then-state Sen. Eric Schneiderman, who debated the measure on behalf of the Democrats.

“I think this is a bomb hidden in a bill,” Schneiderman answered Bonacic on the Senate floor, adding that the legislation amounted to “a declaration of nuclear war on rent-regulated tenants in New York.”

Tenants’ rights advocates are now fighting to repeal the bill, though they have yet to see any success in the Republican-controlled New York state legislature. And unsurprisingly, real estate lobbyists and landlords maintain that offering preferential rent is ultimately good for tenants. “They’re getting a bargain. They’re paying less money than legally they have to,” Frank Ricci, head of government affairs for the Rent Stabilization Association, told ProPublica.

But this also doesn’t account for unscrupulous landlords who fudge the numbers when it comes to the the legal maximum rent for a unit. In 2015, for example, Harlem’s Emo Realty was ordered to pay $14,500 in back rent after overcharging a tenant for years by falsifying the legal regulated rent. As we’ve previously reported, “landlords are responsible for registering their legal rents with the Department of Housing & Community Renewal, but DHCR doesn't actually have the mandate to verify landlords' claims”—meaning it can be difficult for tenants to know exactly what they should be paying.

So while the issue is certainly complicated, there’s a reason why the Metropolitan Council on Housing has this warning on its website: “Tenants with preferential rents are strongly encouraged to learn their rights and options at the earliest possible point.”

• New York Landlords Exploit Loophole to Hike Rents Despite Freeze [ProPublica]
• Preferential Rents [Metropolitan Council on Housing]