Some landlords are using preferential rents as a way to "declare nuclear war" on stabilized tenants
Preferential rent has long been one of the Catch-22s of the real estate world—yes, you're technically paying less than the legal rent for a rent-stabilized apartment, but it also means your landlord can jack up your rent by a significant amount once your next lease renewal rolls around, rather than sticking to the small incremental renewals set out by the Rent Guidelines Board.
Theoretically, preferential rents are simply offered when an apartment's legal rent is above typical neighborhood prices, so it makes sense for landlords to offer renters a lower price. However, what happens in practice is far more complicated and nefarious. For the latest installment in their series The Rent Racket, ProPublica has done a deep dive into the illegal ways some city landlords manipulate the preferential rent system to give stabilized tenants the boot, and ultimately increase prices and take their apartments market rate.
Per ProPublica's reporting, there are a couple of different major issues hurting tenants here. The first is that while landlords are required to register the "legal rent" of these apartments with the city, the veracity of their claims often go totally unchecked city officials, meaning that owners can inflate the legal stabilized rents to as much as $60,000 per year, and have carte blanche to later raise tenants' rents as much as they'd like. (These kinds of hikes go far beyond any number the stabilized rent could be raised to legally, and are also high enough to take an apartment out of the rent-stabilization threshold, but unless city agencies double check the numbers or enforce the limits, landlords are able to claim whatever exorbitant prices they want.)
A more normal use of preferential rent would be a landlord renting out an apartment that could legally fetch $2,900 for, say, $2,500/month instead, giving them the latitude to raise the rent by as much as $400. That's still enough that it would cause most tenants to move out, but not the same as being hit with an illegal increase of thousands of dollars.
Thanks to lax enforcement, the median gap between the monthly preferential and legal maximum rents increased 55 percent between 2008 and 2015 across the city, from a gap of $286 to $444, according to data ProPublica gathered from the Independent Budget Office. In Manhattan specifically, the median difference is over $800.
The second major issue here is when landlords are able to raise prices from their preferential to legal rents. It used to be that landlords could only do so in between tenants. However, per ProPublica, a last-minute 2003 Senate vote changed all that, when a new bill was introduced and the sitting governor, Republican George Pataki, urged lawmakers to pass the bill immediately. Within it was a provision which would allow owners to raise preferential rents to their legal maximum at lease renewal, as opposed to in between tenants.
A state senator at the time, Eric Schneiderman took to the floor to denounce the bill, saying, "I think this is a bomb hidden in a bill," and calling it "a declaration of nuclear war on rent-regulated tenants." With a Republican-controlled Senate, however, the bill passed, and attempts to repeal the rule have so far failed, reportedly thanks in part to efforts from politicians taking large amounts of money from the real estate industry.
The change heavily incentivized owners to utilize preferential rents (legally or otherwise), taking the number of stabilized rentals with preferentials rents from around 100 in 2000, to a quarter of a million in 2017.
While tenant advocates are currently pushing for a change to the rules surrounding preferential rent, if you have this issue with your own apartment (or find yourself presented with a lease that notes a preferential rent), we've got a guide to the issue here.
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