Monday, May 12, 2008

Greedy Conniving Landlords Or Smart Investors?

New York ApartmentsNew York City is home to many rent-regulated apartment buildings. In fact, rent-regulated apartments account for 57 percent of the total in the Bronx, 42 percent of the apartments in Brooklyn, 59 percent in Manhattan, 43 percent in Queens and 15 percent of those on Staten Island, according to The New York Times. Typically these buildings aren’t great investments because the land value is high and the cash flow is proportionately low, but now several private equity funds have discovered a loophole of sorts that is turning these previously poor cash flowing apartments into great investments. It isn’t without some ethical issues, though.

Usually in these rent-regulated apartments, tenants will stay for long periods of time because the rents are much lower in these units than elsewhere in the city and the yearly allowable rent increases are small compared to the actual market increases. The opportunity these private equity funds and investors are exploiting is that when a tenant moves out, the landlord is allowed to increase that particular unit’s rent to market. Considering these rent-regulated units are being rented in some cases at 65 percent or more below market, according to The New York Times, it is easy to see how this endeavor can become quite profitable. The more tenants you can get out of the building, the more money you are going to make. The problem is that these tenants typically don’t want to move, and even if they do, there are often few options of places they can afford to go. This is where the questionable ethical practices come in.

Tenants in buildings that have been bought by the private equity funds are now complaining of harassment and other questionable tactics on the part of the landlords in order to get them to move out of the building. Some of their tactics, such as offering tenants three months' rent as compensation for moving out seems decent, but others, such as harassing phone calls or repeated baseless court proceedings, are over the line, in my opinion.

It seems that many of these firms are having success at getting tenants to move out, but I think many of these landlords are falling into the greedy and conniving area. The idea is a good one, but crossing the ethical line just isn’t worth it, no matter how much they are going to make on these investments. It appears that these questionable activities might come back to haunt them anyway. Some of the tenants who have been “harassed” are filling a lawsuit against one of the private equity firms, and another firm has already settled a lawsuit brought upon them for rent-gouging, according to The New York Times. It has certainly been my experience that it is better to do things right the first time, because if you try to cut corners you’ll pay for it in the end. I think that if these funds are patient and really try to work with these tenants to come to an amenable solution, these investments can work out great for everyone involved. But by trying to expedite things, and make some extra cash at the expense of their tenants, these funds are showing their greed and are likely pay the price.


Damien said...

There was a situation in Washington, DC where a landlord was trying to get tenants out of the building. The landlord let the building go to waste as a motivator for tenants to move out. Unfortunately the building caught fire due to the lack of maintenance and the landlord may face a lawsuit.

It isn't worth it. Landlords do have a fiduciary to their tenants. It has to be about more than the money.

Eric Ames said...

Money can certainly be a primary motivator, but as you said you can't let it be the sole basis for every decision you make as a landlord. When there are peoples' health and lives on the line you better make sure you are taking those things into account. The fact that that landlord put the lives of their tenants at risk just so they could make a few extra bucks makes me sick. It's people like that who give investors a bad name. Thanks for sharing....