Habitat
May, 2007

AN ECONOMIC ENGINE

By Steve Weinstein

Perhaps the most overlooked aspect of the revolution in apartment
ownership in New York City is the way in which it has changed the economic fundamentals of real estate. Sure, when nearly all apartments were rentals, landlords spent money on their property. But since many of those units have become owned by individuals, is more money being spent on them? Is there a net gain to the city’s economy as a whole?

“These are hard questions,” notes Vicki Been, director of the Furman Center for Real Estate and Urban Policy.

“The balance sheet has so many items on it that nobody has calculated it out,” adds Frank Braconi, the chief economist in the city controller’s office and a professor of real estate economics at New York University (NYU). He points out that many such arguments about net gains are spurious because of the complexity of factors. For example, a baseball World Series may only divert money from residents who would otherwise spend it elsewhere.

Similarly, there may be many more banks in the city offering co-op loans. But, theoretically at least, the size of the loan would remain constant whether it was made to one landlord or spread out to individual shareholders. By the same token, apartment insurance would remain the same whether it was for a renter or an owner.

Maybe so, but what if the change from landlords to individual ownership raised the value of the property itself? That would be more money spent overall, wouldn’t it? The fact that the city’s apartment stock today is worth far more in inflation-adjusted dollars than in 1982 is, in fact, beyond dispute.

Raising Value

The New York City of 25 years ago was “basically in political and economic crisis,” says Francis Greenburger, who is president of Time Equities and was a principal player in the conversion revolution. “Politicians had wed themselves to the rental model. Buildings were slowly being bankrupted because owners couldn’t make enough to support them, and the city couldn’t collect enough taxes from them to support the infrastructure.”

Patrick Niland, the president of First Funding, which has helped navigate underlying mortgages for co-ops since 1987, calls the old model “lunacy. In a rent-controlled and rent-stabilized market, it’s very difficult to make any money. In the early ’80s, with horrendous inflation, the operating costs went sky-high. Landlords had no other choice than to convert to co-ops.” Add to that litany of woes the oil embargo and banks redlining certain neighborhoods and you had a full-fledged liquidity crisis.

The wave of conversions did benefit the landlords, who could sell units at a profit (even at rock-bottom insider prices), and the city, which saw buildings whose value had eroded – or even, in the worst areas, been abandoned altogether – contributing once again to the tax base.

“I think the change from rental housing to co-ops and condos is what has saved New York City,” says attorney Stuart Saft, a partner in Wolf Haldenstein Adler Freeman & Herz. “In every part of the city, there’s gentrification. People are taking control of their neighborhoods.”

Landlords were reluctant to put any more money into a property than was absolutely necessary. Shareholders, on the other hand, had a vested interest in fixing up the façade, the common areas, and the interior of their own units. And having such people and apartments in the city led to a net spending increase. That extra money came from the increased value of the units –
a direct result of the conversion from artificially low, regulated or
stabilized rents.

“Rental apartments were now freed up to sell at market rates,” says Richard Grossman, the director of Halstead Property’s downtown Manhattan office. “Because of that, people could put money into the buildings.”

“During the late ’70s and most of the ’80s, for those who bought as insiders, there were profits to be made,” adds attorney Marc Luxemburg, a partner in Snow Becker Krauss and the president of the Council of New York Cooperatives & Condominiums. In the very early days, it was difficult even to find a lending institution that dealt with co-ops. “In the early ’70s, you couldn’t get a bank loan to buy an apartment. My friends were moving to the suburbs, and they’d get a [25 percent cash-down] mortgage. I wanted to live in the city, but it was extremely hard to do. You had to be wealthy, or get seller financing, or borrow from your family.”

Luxemburg worked with then-New York State Assemblyman Peter A.A. Berle to change the law to make it possible to obtain a co-op loan. “Co-oping took off after that point,” he says. “You had banks and sponsors getting their pieces, and even whether there was reselling or buying homes to raise families, what was once throwaway rental payments turned into equity.”

Some of those lucky early birds have been able to refinance against the soaring value of their units to buy more property and rollover the new units
at a profit – or even become landlords themselves.

The American Dream

Esther Muller, co-founder of the Real Estate Academy and president
of Esther Muller Consultants, helped market units in the city’s first condo,
the St. Tropez. She became heavily involved in selling converted rental
units elsewhere and was eventually known as the “Queen of the
Insider Apartments.”

“It’s the American dream to buy and own your home,” she says. “I was selling apartments on Fifth Avenue for $80,000. Those people have built their equity to buy second apartments.” Muller owns apartments, which she converted and sublets. Those units provide her with rental income and continue to increase in resale value. “People like me can leverage the build-up in equity to invest in other apartments,” she says.

As Saft points out, the effect of the conversions has reached every corner of the city and every aspect of real estate. “It’s raised the bar across the board,” agrees Grossman. Even in the ’80s, he says, he was selling apartments in the (then-blighted) Grand Concourse section of the Bronx and Brighton Beach, Brooklyn. Today, the well-known trend for young families to put down roots and for empty-nester suburbanites to move into the city is a direct result of the stability brought on by apartment ownership. “Home ownership has changed the profile of even NYU students and their economic status,”
Niland says. “The average New Yorker is much wealthier than before.”

The co-op model may, in fact, have contributed to the city’s having weathered the collapse rocking housing markets across the rest of the country. “Co-op boards sift through people’s finances,” notes Steven Gottlieb, a licensed salesperson at Warburg Realty Partnership. “Banks are lending freely, but even if someone can get bank financing, the co-op may not let it pass. So people are less over leveraged here than in other places.”

Even at the highest end, where condos have had their greatest impact, co-ops retain their cachet because, as Gottlieb puts it, if you can get into certain Gold Coast buildings, it’s a sign that you’ve arrived socially.

Pamela Hannigan, a professor at NYU’s Real Estate Institute, is bullish on condos, especially for foreign buyers. But, she adds, “The condo market
gets a positive spillover from co-ops. The demand for condos is driven ultimately by the co-op sector. And condos are getting a free ride on the
co-op’s strong financials.”

Ownership means significant deductions on federal income tax not
available to renters. “We introduced New Yorkers to the tax benefits of
home ownership,” Greenburger says. “In other parts of the country, the
value of that deduction was part of the economics of housing.”

“My sense is that this is the biggest plus for the city’s economy,”
Braconi says. “We’re shipping less money to Washington and keeping
more of it here.”

Other factors – such as the growth in Wall Street jobs and salaries, the city’s role as an international center of commerce and government, and the boom in population from immigration – have played their part in the city’s prosperity. But the city government has also benefited from soaring taxes directly related to apartment ownership. The “mansion tax” on sales over $1 million is only the tip of the iceberg. The city collects transaction taxes every time there is a sale. Then there are peripheral levies, such as income taxes made by brokers’ hefty commissions.

Subculture

Not only that, but an entire subculture has arisen around the needs of apartment owners, in ways both obvious and not. Greg Heym, chief economist for the management firm Brown Harris Stevens, points to his own job. “When the market was more rental, there was no need for a ‘chief economist’ to prepare reports,” he says. Heym also points to some other mini-industries catering to apartment buyers, such as mortgage brokers, appraisers, and, inevitably, the lawyers who have to handle all of that paperwork at closings.

Saft, the attorney, got involved in co-ops from personal experience. In 1975, he was living in a two-bedroom Manhattan apartment with a terrace when he was “shocked” by the landlord’s attempt to raise his rent from $470 to $490 a month. After buying an apartment, he became interested in the co-op movement. Now, he works for a great number of developer-clients, and has one of the biggest law practices in the city representing boards (including the country’s largest co-op, Co-op City, and one of the largest condos, Parkchester, both in the Bronx). “And,” he reflects, “all that started by spending $70,000 to buy my first apartment in 1975.”

Aaron Ziegelman, one of the city’s biggest converters in the 1980s, remembers telling the New York Times in 1988 that he was refurbishing an apartment at the then unheard-of price of $6,000 per room. “I met two ladies who did my renovations,” he recalls. “They were decorators and designers. They got themselves a crew of painters and plumbers and did very well.”

Marilyn Sygrove may not consider herself exactly rich, but her specialty, the renovation of public spaces, has given her a thriving interior-design practice and her own building in Hell’s Kitchen. When she started out in 1982, “the ‘white-brick’ buildings had been built by real estate families,” she recalls. “Often the wives had done the decorating: imageless modern buildings with traditional interiors.” When they converted, the sponsor spruced them up – a little. Then, once the shareholders took over, the amount they were willing to spend changed dramatically.

So, is there any wrench in this well-oiled machine of success, say, 25 years from now? Hard to predict, but what may ultimately have the most effect on the rosy economic model of apartment ownership is the rising value of rental units. Ironically, the skyrocketing price of buying (along with rising interest rates) may make renting an attractive alternative. At the high end (over $2,000 per month), vacancy decontrol has made rental housing more attractive to developers, as was dramatically demonstrated by the recent buyout of Stuyvesant Town and Peter Cooper Village. Everyone sees new buildings going up as luxury rentals, with luxury prices to match. Even so, these apartments may inadvertently make a case for the tender, loving care that only comes with ownership. Not to mention the money saved on taxes and accrued from increased value. For that, ownership is hard to beat.