INTERVIEW: Rent Control Is a ‘New York Tragedy’

By Reuvain Borchardt

Richard Epstein, professor at NYU Law School, discusses rent control in New York.

The U.S. Supreme Court last week declined to hear a challenge from New York landlords who argued that the state’s rent-control laws constitute a “taking” by government, for which the landlords are entitled to compensation.

The U.S. Constitution’s 5th Amendment says, “Nor shall private property be taken for public use, without just compensation.” Epstein authored an amicus brief on behalf of the landlords, arguing that this constitutional provision, commonly known as “eminent domain,” requires the government to compensate landlords of rent-controlled apartments for forcing them to renew leases at below-market rates.

Property law is one of Epstein’s numerous areas of expertise; he has written more than 15 books, including “Takings: Private Property and the Power of Eminent Domain” (1984). 

According to a 2021 study by Fred R. Shapiro, editor of the “Oxford Dictionary of American Legal Quotations,” Epstein is the fifth-most-cited legal scholar of all time.

Conversation has been edited for length and clarity.

Tell us a little about rent control in New York.

New York now has essentially the most draconian rent control you can find.

When you’re doing a rent-control type statute, you’re treating every unit as though it’s a kind of public utility. And if you’re dealing with public utilities where there’s monopoly pricing, there’s always a tendency to say, “We have to constrain the rents that you can charge so they’ll keep it at a competitive level.” But this is not a public utility. And these markets are already at or below a competitive level, and so when you strain them even further, it turns out it’s extremely difficult to cover your cost of capital. 

When it’s very difficult to do that, it’s very hard to stay in business. But the gurus in Albany are so confident that they understand how these markets work.

And when you go to the New York courts, it’s a death trap. They’re all consistently pro-government in these cases. You try moving it to federal court, and you get a very liberal panel. And so the whole thing turns out to be bottled up. You look at the situation in the City Council, and you can wait a long time before the drought will be over. So essentially all the current avenues seem to be over. There’s no state constitutional challenge that’s going to be viable, no federal constitutional challenge that’s going to be viable, there’s going to be no state Capitol override of what is taking place in the city. And the city itself doesn’t want to move. So something has got to give. 

What gives is the population: People who cannot find housing in the city at a sensible price march off to places where it doesn’t take you a year and a day to get the first step of a building permit. So off they go to Tennessee, Florida, Texas, South Carolina, Alabama. New York has lost more people in absolute terms than even California, which is no wonderful place. But everybody in power in New York seems to be oblivious to what’s going on, because they don’t take the exit option seriously. And it is going to ruin this city.

You’ve been arguing for decades that rent-control laws are “takings” that require government compensation. Summarize that argument for us.

Under a property regime, when you lease somebody a property, it has boundaries not only in space, but also in time. So when the lease is over, you can keep the tenant in if you want to and accept the rent, or you can get a summary eviction notice. You’ll only keep them in if they continue to pay rent at the market rate. 

But in New York and elsewhere, the law gives the tenant the option to renew the lease perpetually at below market value. Well, an option is a property right. So one way to look at this is the government is giving the tenant a free option — so the government should have to pay for it.

Once they have to pay for it, the game starts to disappear. Because now the city is going to have to pay up an amount equal to what the option is worth. It has to come out of public funds — and the public is not going to want to pay for it. So the whole thing will be shut down. 

The government argues that as long as you give the landlord some right under some circumstances to throw out a tenant after the expiration of a lease — such as for nonpayment of rent — that’s sufficient not to consider this a taking.

Well, how many people are going to refuse to pay the rent of, say, $1,000, when the market value of the apartment is $3,000? 

So this right to throw out a tenant who refuses to pay is worth nothing, whereas the right to control the actual rental amount of the place could be worth a huge amount. 

Take the Upper West Side, where I have an apartment: If you have, say, a two-bedroom apartment at 1700 square feet, the rental is going to be $10,000 or $11,000 a month. If it’s under rent stabilization, under the current law, the most you can charge is $2,500. So it’s a difference of about $7,500 a month, and then you multiply that figure by 12 — that’s $90,000 a year! When you capitalize that, owning the option on the rent-control unit is basically a free gift of a million dollars that you’re getting.

And so people are tenacious. These tenants stay here and vote here, and the political situation reinforces the economic transfer.

You would assume that somebody would be alert about this situation. But what happens when you’re dealing with real estate valuations in New York City, nobody does the straight economic analysis to show you what it is that’s been transferred — the reversion of the building [the right of the owner to take back full rights when the lease ends] which is worth huge amounts of money, being sold to the tenant for essentially nothing under these circumstances. And there is a very deferential rational-basis standard of review. And so the tenant always wins against the landlord.

For better or worse, government today has all sorts of regulations on properties. What distinguishes rent control that it should require the government to compensate the owner?

You have to look at what the content of the regulation is. 

In this particular case, what they’re doing essentially is confiscating the reversion for a fixed price that’s far below the market price — but there are no other collateral benefits. But other times, they give you other sorts of things. For example, they say to you, if you want to own this particular property, we’re going to impose a restriction on upon you that you have to use fire-retardant materials. We do it to you, and we do it to your neighbor. There’s a cost to you for having to put these materials in, but there’s a huge benefit to you from knowing that you’re going to be protected by these materials. And since the regulation is general, it is going to protect somebody else. So when I wrote my Takings work, I said that regulations are always permissible, if they have mutual in-kind reciprocal compensation. So you have to look at the program as a whole, and if the value of your unit when you were subject to the fire retardation rule is increased, because of the direct benefit that you get, and the benefit you get from it being imposed upon everybody else, it’s not a taking.

My favorite case, actually, involves not rent control but a Supreme Court case about the beach renourishment program in Florida. You had a lot of properties along the water — to get as many properties as possible to be along the water, these houses tended to be 30 feet wide and 300 feet deep. It’s great for getting views and maximizing value, but if there’s an erosion risk in this particular location, the distribution of the property among 20 different people creates a real collective action problem. How do you manage to make sure that you can keep this particular beach safe? It makes no sense for any one individual to build some kind of protection, because the high water will come up around him on both sides, and the whole thing will fail. And so what you have to do is have coordinated action. 

So in Florida, they passed a very sensible regulation, which said they would force all beachfront owners to pay for a wall, and also due to renourishment, they now allow the public to walk laterally along the beach. But the beachfront owners get three things: greater protection of your property; and they were very careful when they drafted the regulation that they could never block your view; or deprive you of access to the water. So everybody’s better off because the three things that they get are worth more than the loss of exclusive access to the front of the beach. 

This was upheld by Justice Scalia. He said there wasn’t a taking, which is just wrong; there actually was a taking, but with in-kind compensation! 

You’ve argued that rent-control laws don’t just hurt wealthy landlords, but they actually hurt poor people — the very people they were intended to help.

When you start putting these restrictions in place, the supply of the housing starts to go down. And then anybody who’s poor or on the outside is going to find it very difficult to get in. So you have to increase the supply of housing in order to lower its cost. Here’s one simple thing that you should take into account: There are on the Upper West Side large numbers of units with two or three bedrooms in which they have a single occupant, a widow or widower living in the house, because it’s cheaper to remain in that at under $2,500 a month, than it would be for them to go in the unregulated market, where they’d have to pay $6,000 or $7,000 or more to get a unit. If, in fact, there was an open market, the following thing would happen: The person would leave, and there would be a family of three or four moving in. So you have 600,000 or 700,000 units in New York City, where instead of having a carrying weight of one or two persons per unit, you’d get three or four people. That’s a huge expanse. If you do that, the prices of housing are generally going to go down, and all of a sudden poor people can come in. 

Otherwise, we will continue to see people who have to move to the hinterlands in the city or out of the city, or in some places, they sort of squat, they take a recreational vehicle and park it on the street, and stay there until they’re driven away by the police because they can’t afford to live there, or you will see people sleeping under park benches because they’re sufficiently poor. 

You cannot relentlessly shrink the size of the economic pie and somehow assume that the better, shall we say, distribution of wealth that you’re creating is going to offset those losses. First of all, the wealth doesn’t go to the people whom you think it does. The biggest beneficiaries of the rent-control laws are people who live in these fancy areas on the Upper West Side and Prospect Heights, and most of them have second homes, in Connecticut, or in Florida, and so forth. And they finance that out of the reductions in the rent that they pay in the city. If somebody’s poor, they don’t have those kinds of options. So this whole thing turns out to be just a really terrible situation. This is a New York tragedy. The more progressive we become as a city, the more militant the defense of this. The few people who get huge deals are very, very comfortable. But people who are sitting tenants make sure that everybody else, whether they live in New York State or not, are going to have to suffer massive inconvenience in order to indulge the sitting tenants, who have the political clout to create and to maintain a rent-control law. 

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rborchardt@hamodia.com

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This interview originally appeared in Hamodia Prime magazine.