The Battery Park City Authority (BPCA) announced on Wednesday an agreement with the LeFrak Organization (operator of Gateway Plaza, the community’s largest residential complex) that will roll back affordability guarantees for the dwindling cohort of tenants who have been protected for decades by caps on rent increases.
According to a statement by the Gateway Plaza Tenants Association (GPTA), the deal will limit rent hikes to 2.5 percent per year (for one-year lease renewals) and 3.78 percent (for two-year renewals) through 2030 for the roughly 600 households that were previously covered by a program known as “quasi-rent stabilization” (QRS). That plan mandated that rents for Gateway residents who were protected could not be raised by more than the increase allowed for rent-stabilized apartments elsewhere in the five boroughs by the City’s Rent Guidelines Board (RGB).
This arrangement is likely to disappoint Gateway residents and affordable housing advocates for several reasons. Chief among them is that if the QRS agreement had been extended, covered residents of Gateway Plaza would likely be facing significantly smaller rent hikes.
For example, two weeks ago, the RGB approved increases of zero percent for one-year lease renewals and zero percent for the first year of two-year renewals, followed by one percent in the second year of the renewed lease, for rent-stabilized units throughout the City in the coming year. While the RGB approved slightly higher increases in 2019 (1.5 percent for one-year leases and 2.5 percent for two-year renewals), it similarly imposed zero-percent increases multiple times in recent years, most recently for one-year renewals in 2015 and 2016. Indeed, the last time RGB approved rent increases larger than those enshrined in the new Gateway deal was 2013, when hikes of 4 percent and 7.75 percent (for one- and two-year renewals) were okayed.
Overall, for the years 2010 through 2020, the RGB approved average increases of 1.6 percent and 3.4 percent (for one- and two-year renewals). Viewed in this context, Gateway tenants covered by the new agreement appear likely to pay substantially more over its lifetime than they would have if the earlier QRS accord had been extended.
As a case in point, a hypothetical Gateway household (previously protected by the QRS agreement) currently paying $2,000 per month and renewing its lease ten times (for one year each) in the coming decade would face a total outlay of $261,586.20 in rent if quasi-rent stabilization had been preserved, and the average RGB-approved increase for one-year renewals over the last ten years (of 1.56 percent) were continued in the decade to come. If the same resident renewed his or her lease five times (for two years each) during the same period (and the ten-year RGB average increase of 3.4 percent were continued), that dwelling’s total rent would be $265,617.84.
But, under the new Gateway deal, this same household will face total rent outlays of $275,601.96 (renewing its lease ten times, for one year each) and $268,595.76 (renewing its lease five times, for two years each). Such a resident will end up paying $14,015.76 more over lifetime of this agreement (for ten one-year renewals) or $2,977.92 more (for five, two-year renewals).
In exchange for offering less affordability to residents, LeFrak is being richly rewarded. Chief among the inducements that the developer is receiving from the BPCA is a delay on the “fair market value reset” date contained in its ground lease. This is a function of the exotic nature of property ownership in Battery Park City, where homeowners, landlords, and developers do not own outright the acreage they occupy, but instead lease the space (through the year 2069), in exchange for yearly payments of ground rent, as well as so-called “payments in lieu of taxes” (PILOT), remitted to the BPCA.
Gateway’s lease with the BPCA originally stipulated that its ground rent would increase to eight percent of the property’s fair market value in 2040, but this date has now been pushed back until 2045. To estimate the magnitude of this benefit, it is necessary to assess (at least in broad terms) the overall value of the complex. One measure used by real estate professionals is the gross rent multiplier (GRM)— a figure (based on recent sales of comparable properties) by which a building’s rent roll can be magnified to yield a rough approximation of a sales price.
Court documents related to a recent class-action suit against the LeFrak Organization estimate that the developer collected approximately $512 million in rent from Gateway residents during the period covered by the lawsuit, between April 2008 and the present. This appears to mean that LeFrak’s annual rent roll for Gateway Plaza is approximately $42.6 million. The current gross rent multiplier for apartment buildings in Manhattan is 13.8, according to an April report from the real estate consulting firm Ariel Property Advisors. Multiplying Gateway’s rental income by the current GRM yields a valuation of $570,840,000 for the complex. Therefore, Gateway’s ground rent, if assessed at eight percent of the property’s value today, could jump to $45,667,200 per year.
These estimations are necessarily very conservative, because they are based on current rental income, which is likely to be much higher in the year 2040. But even using today’s numbers means that LeFrak stands to save as much as $228,336,000 in the five years that its ground rent will now be delayed in rising to eight percent of the property’s fair market value.
In the meantime, LeFrak currently pays ground rent of $305,440 per year, according to a bond offering prospectus for debt issued by the BPCA last year. This comes to 99.4 percent discount relative to what the developer would be paying if assessed at eight percent of the property’s fair market value today. This is also a minute fraction of the annual ground rent paid by other (much smaller) residential buildings in Battery Park City—both rental and condominium—which are struggling to remain financially viable in the face of relentlessly increasing costs.
The annual ground rent that LeFrak pays to the BPCA was scheduled to increase to 8.125 percent of the rent roll in 2023, but this has been changed by the agreement announced on Wednesday to require payments of 10.75 percent of “effective gross income.” This distinction may redound to LeFrak’s benefit, in spite of the nominally higher percentage rate. Effective gross income is usually defined as the total rent roll, minus costs such as repairs. Because Gateway is the oldest building complex in Battery Park City (nearing its half-century anniversary), and because the property was constructed as cheaply as possible, it is likely soon to need very expensive upgrades and capital improvements. Subtracting these costs (which may run to many tens of millions of dollars) could mean that LeFrak will pay less in ground rent, even on the 10.75 percent baseline, than the developer would have under the original terms of 8.125 percent. Indeed, the BPCA’s statement announcing the deal refers to a codicil that, “requires a minimum capital investment in the complex during this period,” but does not specify what that amount is.
Finally, the BPCA’s statement also says that LeFrak has agreed to pay approximately “$13 million in owed commercial real estate taxes over the next three years.” Why paying property taxes that are already owed—and being allowed to do so over three years—counts as a concession remains unclear.
There are multiple other contexts in which Gateway residents and affordable housing advocates are likely to find the new Gateway deal discouraging. First, the agreement ignores a call issued by the Gateway Plaza Tenants Association (GPTA), Community Board 1 (CB1), and multiple elected officials to offer affordability protections for all Gateway residents, rather than the 600 or so households currently receiving them. This coalition called for any new rent stabilization regime to protect all current and future Gateway tenants for the life of the new agreement. That would have marked a return to the long-standing status quo, under which all apartments in the complex were protected for the life of such an agreement. This precedent was followed by a series of pacts, starting in 1987, and continuing with successor accords in 1995 and 2005.
That universality was eliminated in the 2009 agreement, which protected only tenants living in Gateway as of the date that deal went into effect. Since then, churn and attrition among tenants have resulted in roughly two-thirds of Gateway’s 1700-plus households receiving no affordability protections at all.
Second, the same coalition demanded that new affordability measures at Gateway apply for as long as the landlord derived any benefit from such a deal. But, as noted above, a minority of residents will receive limits on rent increases only through 2030, while LeFrak will continue to reap dividends through 2045.
“The new deal is not perfect, but it continues significant protections to those long-term tenants who have lived at Gateway since 2009,” the GPTA said in its announcement, adding that, “we are disappointed that the deal did not provide stabilization for all current tenants. We are also disappointed by the decision to permit annual rent increases for ‘stabilized’ tenants based on fixed percentage rates. The RGB takes account of current economic conditions in setting its rates. RGB renewal rates in recent years have been below 2.5 percent and in fact are zero percent for the coming year, due to the pandemic. Notwithstanding the new agreement’s 2.5 percent rent cap, GPTA believes that during the coming pandemic year all Gateway tenants should be offered renewals at zero percent. There are many Gateway tenants who are suffering job and income loss due to the pandemic; they will be particularly hard hit by any rent increase at this time.”
In the BPCA’s announcement of the agreement, Authority president B.J. Jones called the deal, “an important first step in our continuing efforts to preserve and even expand affordability and certainty in Battery Park City.”
Matthew Fenton
