Litigation Update: New York's "Rent Stabilization Act"

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Does New York’s “rent stabilization” law violate the federal Constitution? The law, which regulates approximately 1 million apartments in New York City, was enacted more than fifty years ago and remains in effect based on an every-three-year declaration of a housing “emergency.” The law does not merely regulate rent levels. It also limits a property owner’s right to determine who uses an apartment, to convert the property to new uses or to replace the existing building with a new structure, and to occupy the property for use by the owner and his or her family.

A lawsuit filed in 2019 asserts that the New York law—including 2019 amendments that significantly increased the restrictions on property owners— violates due process and effects both physical and regulatory takings of the property that it regulates. After being dismissed at the District level, the case now moves to the United States Court of Appeals for the Second Circuit.   

Rent regulation is not just a New York phenomenon. Other cities across the country have enacted, or are considering, rent regulation legislation. Andrew Pincus, lead counsel for the plaintiffs, and Dean Reuter, Federalist Society Senior Vice President and General Counsel, will discuss the constitutional challenge in the context of the Supreme Court’s evolving property rights jurisprudence—including last Term’s decision in Cedar Point Nursery v. Hassid

Featuring:

Andrew Pincus, Partner, Mayer Brown

Moderator: Dean Reuter, Senior Vice President and General Counsel, The Federalist Society

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As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.

Event Transcript

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Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.

 

 

Dean Reuter:  Welcome to The Federalist Society's Teleforum webinar as today, January 27, 2022, we host a litigation update on New York's Rent Stabilization Act. I'm Dean Reuter, Senior Vice President and General Counsel of The Federalist Society, pleased to welcome you today. As always, please note that all expressions of opinion are those of the expert on today's call, which is being recorded and will likely be transcribed and posted on The Federalist Society's website and as many other venues as we can manage.

 

      I'm very pleased to welcome our guest speaker today, return guest Andy Pincus. He's a litigating partner at the Mayer Brown Law Firm right here in Washington D.C. And he represents the plaintiffs in the case we're going to be talking about. He's going to give us some opening remarks, 15 or 20 minutes or so. But then, as always, we'll be looking to you for audience questions. If you have those in mind, we'll be using the Q&A function at the bottom center of your screen. If you could get us your questions in that fashion, that would be most helpful.

 

      But with that, Andy Pincus, the floor is yours.

 

Andy Pincus:  Thanks very much, Dean. And thank you and The Federalist Society for inviting me to talk about what I think is a quite interesting and important case. To set the stage, it's really critical to understand the scope of the New York law. I think people hear "rent regulation" or "rent law" and they think, well, that's just a law that's regulating rent levels. But the New York law does much more than that. It's been proudly described by its supporters as the most stringent set of regulations in history, and it is. And that's particularly true after the 2019 amendments that greatly increased the restrictions imposed by the law.

 

      So this New York law rests on an every-three-year declaration of a housing emergency by the New York City Counsel, something that's happened like clockwork for the past 50 years. Property owners who are subject to the law effectively lose control over the property. The purpose and effect of the law really is to commandeer that property in perpetuity for use as rental units controlled by the government. And so let me just tick off a couple of the restrictions that apply.

 

      First of all, the property owner must renew the lease unless the tenant engages in misconduct, essentially legal violations. And, also, not just for the tenant to whom the property owner initially rents the apartment. The law provides that the property owner has to accept successors. They can be the tenant's relatives or caregivers. And then those successors are allowed the same renewal-in-perpetuity rights. I like to use the illustration -- people may remember Friends. Monica lived in her grandmother's apartment. I actually thought that that was not an accurate depiction of the law, but it's true. If you move in when a relative is there and you stay for a prescribed amount of time, then you basically take over, as she did, the right to have a rent-stabilized apartment and all of the renewal rights.

 

      The property owner can't refuse to renew for his own use or her own use or for the use of a family in a small building — for example, if a property owner wants to have an elderly relative or children live in an apartment in the building — unless they can meet a very high standard, and only then, one apartment per building. The property owner can't change the use from residential to commercial rental. The property owner can't convert the building to a condominium without permission of 51 percent of the tenants, even if the conversion would allow the tenants to stay in place.

 

      The property owner can't demolish the building without finding housing for tenants at the same or lower rent in the neighborhood. And that's led to property owners essentially making very, very large payoffs when they have a need to demolish the building.

 

      Also, the offramps that used to exist to eliminate these controls don't exist anymore. There's no vacancy decontrol. At some points, New York has said if an apartment becomes vacant, it can be not subject to this rent regulation scheme anymore. That doesn't happen. There used to be a decontrol if the tenant had a high income or the rent reached to high levels, or even if both of those existed. Now, none of that.

 

      The government, in this case -- the government defendants tout the owners' ability to leave the apartments vacant when and if a tenant and all of her successors have left. But that's hardly a benefit to say, "Good news. You get to have your property vacant, and you can't make any money from it."

 

      So, so far I've talked about the restrictions that sort of lock the property in to renting and deprive the owner of the control over who lives there. But I don't want to ignore regulation of rent levels, because that too is pretty draconian. By New York's own calculation, owners' costs have increased at twice the rate of permitted rent increases. And the law imposes very, very severe limitations on the owner's ability to recoup improvements to units.

 

You can imagine — given the automatic renewal rights and the requirement of continuing to rent to successors — these apartments don't become vacant very frequently. When they do, landlords would like to upgrade them. They often need upgrades because of the length of time that's elapsed. The law imposes a limit on the ability to recoup those investments. Fifteen thousand dollars every five years -- far less than what's needed when a lengthy tenantship ends. And there's also a significant and very low limit on the amount that can be recouped for building-wide improvements.

 

      And, finally, the complaint explains, based on government data — and it won't surprise anyone, given the restrictions that I've listed — that rent-stabilized properties are worth from 25 to 50 percent less than non-regulated properties. And that study that we rely on was done before the 2019 amendments to the law, which we calculate impose another 15 percent reduction.

 

      So that sort of sets the stage for the law. Let me talk a little bit about our claims. We have four basic claims that we've advanced in this case that assert constitutional challenges to this New York regime. One is that it constitutes a physical taking. The courts have defined a physical taking as a government-authorized nonconsensual physical occupation of property. If a plaintiff can establish that, that's automatically a compensable taking. There's no balancing test. The only question is how much compensation is owned.

 

And, in our view, that's exactly what the rent stabilization law does. It effectively takes over the property, forces it to be rented in perpetuity -- tenants for lifetime, successors. The owner can't pick the tenant or, indeed, as a practical matter, is effectively barred from changing the use. So we think that is a classic physical taking.

 

      We also make a regulatory taking argument. As people, I think, know, there are different flavors of regulatory takings. We assert two. The first is, because the New York law sets rent levels based, in part, on the tenant's ability to pay, it violates the takings clause. This is not a typical kind of price control. As I'm sure people in this audience know, price controls typically say we're going to allow the controlled seller of the good or of the service to recover her costs plus a reasonable rate of return, but we want to limit the charge to that level.

 

      Here, there's an additional factor that the government has to take into account, which is tenant ability to pay. And we think that violates the takings clause, based on a theory that Justices Scalia and O'Connor spelled out in a separate opinion in an old Supreme Court case called Pennell that involved a rent regulation law. They said, "Laws are takings when they force a selected group of property owners to bare burdens that should be born by the public at large."

 

And, in traditional land use, there's a cause and effect between the regulation and the social evil to remedied. Zoning, for example, is a classic example. The uses of the property that zoning seeks to prohibit are the things that are the harm that the government seeks to prevent. But where the use of the property isn't the source of the problem, they said it can't be burdened. And that's particularly true of providing housing for low-income people.

 

That's not something that these landlords have caused. They haven't caused the ability of people to have lower incomes or to not have enough money for rent. That's a societal problem caused by all kinds of things. And so we say that this theory — which wasn't addressed by the majority in Pennell, or by a subsequent Supreme Court — is an open issue, and that it is directly applicable to the New York scheme.

 

We also make a more traditional regulatory taking argument, using the multifactor test that the Court laid out, first in Penn Central, and as applied in a bunch of other cases. And, here, all of those factors weigh in favor of taking. There's the nature of the intrusion. It's a physical invasion of the property, as I've discussed, essentially commandeering it and forcing upon the owner tenants not chosen by the owner. There's a significant reduction in value and interference with investment-backed expectations. There is not the factor that sometimes justifies government regulation, which is preventing noxious uses or harmful uses of property.

 

And, finally, there's no reciprocal benefit. The classic justification for zoning is although I'm burdened because my property is zoned residential, I get the benefit of the fact that my neighbor's property is zoned residential. And, therefor, I won't have an asphalt plant built next to my property. And that reciprocal benefit is something that the courts have frequently pointed to to justify government regulations. Here, there is no reciprocal benefit. These property owners, who are directly regulated by the RSL, don't get any benefit from it.

 

Finally, we make a due process argument. Hard to win, obviously, under the current rational relationship test. But we think the RSL, the rent law here, is far from satisfying any legitimate government objective. Sometimes it's talked about as a benefit for low- and middle-income families. But there's no targeting here. And, in fact, there have been many studies and newspaper articles identifying very wealthy people who live in rent-stabilized apartments and are getting the benefit of them.

 

And, in fact, the New York government eliminated, as I said earlier, decontrol based on tenants' high income. So, if anything, that confirms that there's no targeting here of lower- and middle-income people. Sometimes the law is justified as dealing with a housing shortage. It's designed to make sure apartments are available. But it actually exacerbates a housing shortage — every economist will tell you — because it prevents, for example, the rebuilding on properties where the whole zoning envelope has not been used. It prevents the construction of new units.

 

It also, because regulation is something of a zero-sum game, if this is depressing rents in stabilized apartments, non-regulated apartment rents are rising. So it's hurting people in a significant way.

 

Finally, the argument that the defendants have really landed on is a contention that this provides for neighborhood stability. But, again, it exacerbates the housing shortage. And that stability really is another word for a discriminatory effect. Older tenants who happen to get there have the benefit of this housing. Because of the low rent and the low increases permitted, they tend to stay in apartments that may be larger than they need. And that's hurting lots of people who need those apartments.

 

So those are our four claims. We're asserting them on a facial basis. These laws and regulations apply across the board to all rent-stabilized properties and impose burdens on all of them that, in our view, amount to a constitutional violation.

 

So, with that stage set, let me talk a little bit about where we are. The district court dismissed our case. We weren't surprised by that. There had been a number of prior challenges that had been heard in New York and ultimately went to the Second Circuit. We think those precedents have been undermined significantly by Maurice and Supreme Court decisions, as I'll talk a little bit about. But the district court relied largely on those and also the argument that — notwithstanding the very detailed allegations of our complaint — there wasn't enough to assert a facial claim on the regulatory takings front.

 

And, on the due process side, the Court said -- understood our arguments, but said, given the low standard, he had to find due process satisfied.

 

So now we're in the court of appeals. The case is fully briefed. There will be an oral argument on February 16. And we've gotten very strong support from amici who, we're grateful, recognize the importance of the issue that we're raising -- ten amicus briefs in all. They fall into two categories: some national and New York industry groups; realtors, apartment owners, home builders, even some apartment associations from California, because rent regulation is a serious issue there; and then a number of the leading U.S. groups that will be familiar to this audience who advocate for the protection of property rights -- the Pacific Legal Foundation, Cato, the Institute for Justice, the New Civil Liberties Alliance.

 

The other side -- I think its supporters recognize the importance of the case. They've got amicus briefs as well, multiple briefs from unions, tenant groups, and professors.

 

We think we've got a strong legal position. I'm happy to delve into whatever people would like to talk about. But maybe I'll just talk quickly about the physical taking argument, because I think that's where the law is particularly clear. The Supreme Court, years ago, decided a case called Yee that dealt with the rental of property for the positioning of mobile homes. And, in that case, the Court said it rejected a physical taking argument. The argument was made by the property owners because the statute allowed one mobile homeowner to essentially transfer the lease to another. The property owner there said, "Our right to exclude, to control whoever enters our property is infringed upon because we can't control who rents."

 

The Court rejected that argument. But it cited as extremely important the fact that, under that regulatory scheme, the property owner could withdraw the property from the rental market with about six months or in a relatively short period of time. That, obviously, sharply distinguishes that case from ours, where, for the reasons I've described, the property is effectively commandeered for the long-term. So we think Yee actually supports our position, although the other side relies on it to a significant degree.

 

The other case that is very supportive is the Horne case.

 

Dean Reuter:  Andy, can I interrupt you just briefly?

 

Andy Pincus:  Sure.

 

Dean Reuter:  In your opening remarks, you cited a number for how long — and this goes to the Yee analysis — how long these emergency powers have been used. Did you say 15 years, or 50 years?

 

Andy Pincus:  Fifty, five-oh.

 

Dean Reuter:  Okay. Okay, good. Sorry to interrupt with that.

 

Andy Pincus:  Since the enactment of the law, of the authority to impose these regulations, like clockwork, the emergency has been found to continue and not to have been remedied by the law, which is sort of interesting. If your legitimate government purpose for this law is that it's going to ameliorate a housing shortage and it hasn't done it in 50 years, there's sort of an interesting question about how sensible that linkage really is. But, yes, 50 years is how long this has lasted.

 

Let me -- the Horne case, people may remember, involved raisins and a government regulatory program that required raisin owners to essentially give part of their crop to the government. And, in that case, the federal government argued no taking here because you don't have to be in the raisin business. And if you're in the raisin business, you've essentially voluntarily acquiesced to the government taking part of your crop. And the Court gave relatively short shrift to that argument and said, " We can't condition people being in the raisin business on something that would otherwise be a taking.

 

      Here, a large part of the government defendant's argument is once you decide to be in the rental market, the government can do whatever it wants, in terms of limiting your right to exclude or to take your property back. So we think Horne is a strong case. But, since we filed our brief — and we've now, just recently, filed supplemental briefs on this — as this audience probably knows, the Supreme Court decided two cases involving takings claims, Cedar Point and Pakdel. And they provide additional strong support, we think, for our position.

 

      Cedar Point, of course, addressed the takings challenge to a California law that permitted union organizers to enter farms for up to three hours a day, 120 days a year. And the court of appeals in that case had said no physical taking, because the right to enter wasn't 24 hours a day, 365 days a year. And it said anything less has to be analyzed as a regulatory taking.

 

      The Supreme Court reversed, held it was a physical taking, emphasized the importance of the right to exclude, and that interference or physical appropriation of property by the government — for itself or a private party — violates the takings clause because of the interference with the right to exclude. And it said that's exactly what happened here. The government was basically taking a segment of a property owner's right to exclude, and saying, "We the government require you to allow these people to enter onto your property, even though you don't want them to."

 

      That significantly expanded the category of physical takings, we think, or made clear what we think the category is. The defendants in our case have made exactly the same argument that was rejected in Cedar Point. They said, "Because the rent stabilization law isn't permanent and doesn't completely eviscerate the right to exclude, it isn't a physical taking." Obviously, that argument is off the board.

 

And we think the law does exactly what Cedar Point says is prohibited. It interferes with the property owners' right to control who enters the property, for the reasons that I have given. You can't decide who the tenant is. You can't change the use, etc. So all of those restrictions have the purpose and effect of forcing owners to rent to tenants, whether that owner wants to or not.

 

      Cedar Point also rejected the argument that the law there was a longstanding background restriction on property. There, the law had been in effect since 1975. And the court said, "When we talk about background restrictions, we're talking about the fundamental common-law restrictions, not restrictions that have been imposed by government that are in addition to those restrictions. And, of course, that, again, is exactly what the rent regulation is here.

 

      Finally, the Pakdel decision, which was a summary reversal by the Court, was a challenge to a San Francisco law that conditioned the ability of people who owned property as tenants in common — apartment buildings' tenants in common — to change to a condominium structure. They said, "You can do that, but you have to give a lifetime lease to anyone who's a tenant." That was claimed to be a physical taking. The lower court rejected it. The Supreme Court, in addition to overturning an exhaustion ruling that the Court of Appeals had erroneously imposed, remanded that case for application of Cedar Point to those arguments about physical taking.

 

      So, bottom line, we think these decisions provide additional, very significant support for our physical taking argument. And it will be very interesting to see how the Second Circuit deals with them.

 

      So let me stop there — because, obviously, the most important thing is to address folks' questions — and move on to the questions that people have.

 

Dean Reuter:  Great. Thank you so much, Andy. You've set the table really, really well, I think. And my first, obvious, question is how do I get one of these rent-controlled apartments?

 

Andy Pincus:  It is like a lottery ticket.

 

Dean Reuter:  Well, it really seems to be so. You mentioned that this has the effect of reducing the value of these properties by 25 to 50 percent, and maybe another 15 percent, given the age of that study. Is there any evidence in the record about, with this in place, I can lease an apartment that would ordinarily cost $4,000 for $2,000, those types of numbers? What is the bottom line for the potential tenants, not on the value of the building, but the monthly lease?

 

Andy Pincus:  Well, they obviously vary, because the increases depend on --

 

Dean Reuter:  -- Right.

 

Andy Pincus:  -- what the base has been. There's a great, a huge amount of variance. But we quote -- one of the things we did in this case was we recognized that, because of the Second Circuit precedents that I referred to, there was a strong likelihood of dismissal in the district court, although, we obviously argued that those precedents had been superseded. So we filed a very, very detailed hundred-plus page complaint, in order to lay things out very clearly, in terms of what we think the factual record is.

 

      We didn't collect rent levels. But, obviously, those values, property values, are a direct reflection of what the rent levels are.

 

Dean Reuter:  Right. Interesting, interesting. We do have a couple questions. And I'll remind the audience, try to use the Q&A function, if you could. I've got other questions of my own. I'm going to ask one more before we turn to the audience, Andy, if you don't mind, and that's about the procedures in the Second Circuit. I'm sure you must be familiar with them by now. Is a panel named for the oral argument? If not, when will that happen? And what's the history of that court? I think it's pretty stingy, in terms of going en banc. And I'm getting ahead, procedurally, here, but just curious.

 

Andy Pincus:  Well, A) you find out the panel sort of the week before. So we don't know who the panel is yet. B) I think, historically, there had been a great reluctance for folks to go en banc in the Second Circuit. And many Second Circuit judges have written about that fact. I think, with some changes in personnel in recent years, the last couple of years, there have been more frequent en bancs. Hard to tell where that would go with us. We're, of course, hoping to win before the panel and not have to worry about that.

 

Dean Reuter:  Yeah. No, of course, of course. I was just curious. I just see a chat here. Somebody says that, "I'm a New York City landlord. I have a $47-a-month rent for a unit worth $4,000 a month."

 

Andy Pincus:  That just tells you how, if somebody has been in that property for a very long time — and it started out at a low level in 1974, when these controls -- well, '69, and then '74, when they were sort of really solidified — you can have a very, very, very low rent, compared to what the market rent is.

 

Dean Reuter:  It's pretty easy to spend more money a month at Starbucks than on your rent there. So, again, use the Q&A if you have a question. The first question I see here is, "It sounds like this is essentially a public benefit being provided by private actors, in this case, private owners of private property. Is that correct?"

 

And then, I would augment that with anything you know — you know about the plaintiffs, obviously. Is this the typical big guy versus little guy? Are we talking about mega-corporations that own skyscrapers full of rent-controlled units? Or is it that, plus somebody that owns a brownstone and they're renting out the basement or the second floor, or four-unit apartments? What are the equities there?

 

Andy Pincus:  So, just in terms of the scope of the law, this is about pre-1974 buildings of five units or more -- of more than five units. So, these cover — if you're a New Yorker, as I am — the brownstones that you walk by when I grew up on the west side of Manhattan that have been turned into rental units. And so a lot -- many, many, many of these buildings are owned by families. They're mom and pop landlords. Some of our plaintiffs in this case, in addition to some trade associations, are mom and pop landlords. And so this is not mega real estate, owning skyscrapers that are 65 stories tall. A large part of this burden is falling on small property owners.

 

      And, just to get to your question about is this a public benefit being forced to be provided by private actors, that's not just what it is as a matter of fact, it's what it is in a matter of New York law. The New York Court of Appeals, in a decision in the bankruptcy context, held that the rent stabilization benefits that a tenant has are public benefits provided by a discreet group of people. And, that decision, recently, was codified by the New York legislature. So we don't have to guess. We have definitive recognition by New York that this is a public benefit. But it's being provided by this small group of -- it's not small, it's a million apartments, but property owners who have been singled out to provide that benefit and to finance it entirely themselves.

 

Dean Reuter:  Right. Interesting. Here's a question from a distressed property owner who doesn't want to interfere with your case but wants to know how he can petition for immediate relief for his right to exclude, meaning, he wants to use his own property for his own primary residence. That's a little beyond your case. I don't know if you want to respond to that, or if you want to go to the next question.

 

Andy Pincus:  Well, there have been, and my guess, there will be more cases of owners bringing as-applied challenges, based on their specific circumstances. Owners who, before the law, the 2019 amendments, took effect, had put in place renovations and now — there's nothing more literally a taking than saying, "Even though you've invested money in your property, we are not going to allow you to recover the value of that investment." That's what this law basically does.

 

And so there are people trying to focus on the targeted problems they have. The right to recover for your own use is another significant problem. One of our plaintiffs wanted to recover a unit because of the need to have a ground-floor unit, due to some physical disabilities. And this law, as I said — and this became more draconian in 2019 — says you cannot refuse to renew unless you can meet an extremely high burden. And then, only one apartment.

 

So, if you have a five-apartment, six-apartment building, and you have elderly parents — you're living in it, but you'd like to have elderly parents move into it so you can be their caregiver — you can't do that. Or you'd like to have your children live with you. Maybe your children have a grandchild, and you'd like to be the caregiver for that grandchild after school. You can't do those things. And that just seems to be an unbelievably direct and obvious interference with what we would consider traditional property rights.

 

Dean Reuter:  And, I suppose, reconfiguring your units, if you have a five-unit brownstone that this applies to, and you try to take down some walls and end up with a three-broom brownstone that might be more marketable, might be better for the neighborhood, that that would probably make you a violator of the act, I suppose.

 

Andy Pincus:  Well, first of all, you could only do that when units are vacant, unless you can meet the very high standard and very significant costs of relocating existing tenants. But then you can't change the use. So, even if you do that, your ability to recover that, what would be a significant investment, is also capped. Just to give people a sort of a metric, the amount that you can recover for renovating an individual unit is $15,000.

 

Some of these units will have been occupied for 20 years. If they happen to become vacant, if you're a diligent property owner, you would like to bring them up to code. That typically takes $50,000 or more. But you can only recover $15,000. And the recovery process — I won't get into the economic details — very low. And similar, a very low cap for building-wide improvements.

 

      So one of the bizarre functions of the law is actually to create an obvious and huge disincentive to bringing buildings up to what a reasonable property owner would want them to be. But, also, to take your example, what if the zoning envelope on your property would allow you to build an apartment, a building that could have 10 apartments? And you'd like to make that investment. You believe there's a future in the New York market. You can't do that either.

 

Dean Reuter:  Interesting. And, going back to the questions in our Q&A — and if you're in the audience, please feel free to add to these — this goes to your remedies that you're seeking. Is this money damages? An injunction? Some combination?

 

Andy Pincus:  We are not seeking money damages. We are seeking an injunction. We think this law -- way beyond anything the Constitution permits. We think it has to be invalidated. We're not naïve to believe that the Court is going to say there can't be any regulation of rental properties. There can be some, obviously. But it has to be within constitutional constraints. And what we're hoping for and looking for is these guardrails to be established.

 

Dean Reuter:  Did you look at the state constitution? And is it unfriendly to these claims? I assume these are all federal constitutional claims, all in federal court.

 

Andy Pincus:  Yeah. And we could have thought about state law claims, but of course you can't bring state law claims against states in federal court. And, we thought, for our federal constitutional claims, we really wanted to be in federal court.

 

Dean Reuter:  Sure.

 

Andy Pincus:  And so we were not able to — given that strategic decision — to bring state law-based claims.

 

Dean Reuter:  Yeah. That makes perfect sense. A lot of our members — Federalist Society members, conservatives and libertarians — they bristle at the idea of the exercise of emergency powers. Covid is a good example, where some people are concerned that if you're able, as an entity, as a government entity able to declare an emergency, and then declare its end, and in the meantime, have enhanced powers, the incentives line up in a perverse way. 

 

     Is the city saying anything at all about the span of this? The fact that this is an ongoing and updated emergency every 3 years for 50 years? And do they say something in the nature of Justice O'Connor, that we would expect this to end in 25 years like affirmative action? Or just business as usual?

 

Andy Pincus:  No. And, in fact, part of the rational of the proponents of the 2019 amendments was basically cracking down on the ability to move properties out of control was the idea that they wanted to preserve these properties as rental properties. That's sort of the stated -- and rental properties subject to these restrictions. So, it's interesting that the statute -- that the necessary condition for an emergency is a less than five -- five percent or less vacancy rate.

 

And then, the statute certainly contemplates additional criteria. New York has really never spelled out what those are. It's quite clear that in New York City there are areas that don't have -- that have a higher vacancy rate. But the city has consistently applied that standard on an across-the-board basis. Because the goal clearly has been to ensure that this regime stays in place.

 

If you back up and look at the environment, there are a million of these apartments. The people who have them obviously feel very strongly about the limitations on property owner rights that they have, and the benefits to tenants. The people who are in nonregulated apartments, who are bearing the burdens of this for the reasons I said — housing shortage, increased rents — have a less direct benefit. So, if you think about how the overall environment works, you have some very highly motivated constituents who want to keep this regime in place.

 

Dean Reuter:  Sure. Sure. It always seems to be that way. The next caller question, or viewer question, I guess, concerns the reported retirement, upcoming retirement of Justice Breyer, and what effect that might have. Of course, he won't retire until the end of the term, at the earliest. But this case won't reach the Supreme Court before the end of the term. I remember that in the Cedar Point case, he wrote the dissent, I think. And it was 6-3, so. But go ahead and answer that question if you could.

 

Andy Pincus:  Yes. He wrote the dissent. Obviously, we don't know who's going to replace him. And we don't know that person's views, so, hard to predict. But I think the Cedar Point majority -- and Cedar Point, if you look at the Court's recent takings jurisprudence, there was Cedar Point, but Cedar Point was preceded by the Knick decision. People will remember that, prior, under the old Williamson County case, takings claims had to be brought first in state court. If the state had an inverse condemnation remedy — had a remedy for laws that are claimed to affect the taking — Williamson County said you had to first go to state court before you can bring your 1983 case in federal court.

 

And what a surprise. The effect of that was that the state court decision was res judicata of your claim, or collateral estoppel. And, so, effectively, you could never get to federal court, or hardly ever, on a takings claim. And Knick — in another opinion written by the Chief Justice, as was Cedar Point — said we're not going to continue to allow takings claims to have this second-class status compared to every other constitutional claim, which can be brought without an exhaustion requirement, directly in federal court, under 1983.

 

      And, so, I think those decisions and Horne indicate, among a number of the Justices, significant concern with ensuring that the constitution's protection of property rights gets appropriate scope.

 

Dean Reuter:  Did the defendants here, did they discuss any of the -- I don't know if you'd call it unintended consequences. There seem to be so many and they're so longstanding, it's hard to say they're unintended anymore. Do they answer to that at all? Or are they silent on some of those unintended consequences?

 

Andy Pincus:  Well, I think these issues mostly come up under the due process rubric, because that's where you're sort of looking at the government interests that are supposedly furthered. And I think their position is there's government -- they focus on protection of low- and middle-income people. They focus on preserving, in their terms, rental housing.

 

And they focus on community stability, without really spending a lot of time discussing the obvious ways in which those interests are furthered and are, in fact, harmed by the law. So what they want to do is sort of paint this as a battle of the experts and say under the low standard rational relationship test under the due process clause, that's all they have to show.

 

Dean Reuter:  So their defense in court seems to focus on middle- and lower-class people, although the policy, if I heard you correctly in your opening remarks, it doesn't focus on exclusively.

 

Andy Pincus:  No. And we quote, in our complaint, we quote a number of articles in New York papers, including a study by the Wall Street Journal, about the very -- not only some very well-known people who are in rent-stabilized buildings, apartments, paying very little, but an overall study that shows that a pretty significant percentage of the people who are getting this benefit have quite significant high incomes. And, I should say — I'll do a little ad, for people who are interested in looking at the pleadings — we have a website called unlawfulrentregs.com, that has our filings in the case.

 

Dean Reuter:  Again, that's unlawfulrentregs.com?

 

Andy Pincus:  Yes.

 

Dean Reuter:  Unlawfulrentregs.com. So, let's say you prevail. What do you get? And then I'm going to go back to another audience question, a fact-specific one.

 

Andy Pincus:  We think we get a declaration that the law in unconstitutional. And we get reasoning by the court that reaches that conclusion, explaining why the current regime violates the Constitution. And, that, obviously, the declaration injunction, but also the reasoning, will constrain what New York can do in the future.

 

And our goal is to have a rational New York housing policy that deals with the housing shortage, recognizes that opening the door to building larger properties, on these rent-regulated properties -- one of the studies that we did and that we summarized in the complaint, looked at the extent to which these properties don't use the entire zoning envelope. And it's quite significant.

 

      So, if there was a greater ability of these property owners to say, "You know what?" as I said earlier, "I'm going to make an investment in New York. I'm going to either add some floors, or, obviously, depending on what the engineering permits, I'm going to expand the number of apartments on my property to do that. Obviously, probably have to have an empty building. But I would make that investment." Isn't it totally rational that we would want to allow that, and, in fact, to incentivize it?

 

Dean Reuter:  Yeah. I'm just curious. Is there a grandfathering clause here that would prevent somebody from bringing themselves under this regime if they had a four-unit brownstone and they put a top deck on it and end up with six units? Are they then subject to this? Or are they grandfathered in?

 

Andy Pincus:  There are sort of two requirements. It has to be a pre-1974 building, and also have the requisite number of units.

 

Dean Reuter:  Okay. Interesting, interesting. So --

 

Andy Pincus:  There are programs, tax rebate programs and other programs that New York has that say if you take advantage of this rebate program, you will be subject to rent stabilization. Obviously that's an entirely different situation from the owners who have had rent stabilization thrust upon them. In some of the post-Cedar Point filings by the defendants, they sort of point to those apartments, which are 15 percent, roughly, of the million apartments that we're talking about. Obviously, they are a totally different animal than the people who didn't make that choice and were subject to rent stabilization without any countervailing benefit at all.

 

Dean Reuter:  Yeah. Interesting. I keep saying I'm going back to the audience. But since we're talking about the remedy here and what you get -- you mentioned in your opening, I think, that this is among the most onerous, or the most onerous rent control statute in any city. Are you -- do you want to get this to the Supreme Court, so that you can maybe set a national standard or get some national standards out of the Supreme Court, and maybe have an impact in Chicago or Los Angeles, or San Francisco, or wherever else may be similar?

 

Andy Pincus:  Our goal is to get relief for our clients. Obviously, the sooner the better, and whatever court we can get it in. This is a national issue. I don't think it's a coincidence that one of the amicus briefs in our case was from the San Francisco and California Apartment Associations. It is an issue that is getting increased discussion — rent regulation — around the country, as an option, notwithstanding the fact that the economic studies really -- it's amazing. And we quote some quite distinguished economists in the complaint, dealing with these due process rational relationship issues. They're basically -- there are very few things that economists agree on. One of them is rent control, rent regulation, is bad.

 

Dean Reuter:  Yeah.

 

Andy Pincus:  Is bad for the market in all kinds of ways. But it seems to be an approach that is getting talked about by government officials and advocacy groups much more in recent years and days.

 

Dean Reuter:  Right. Very good. So, now, back to the audience here. "How do you reconcile the appellant's claim that the New York City Rent Guidelines Board has failed to fully compensate them for changes in operating costs, when the RGB's own data shows that owner net operating income has increased over 50 percent — and that's after adjusting for inflation — since 1990?" I don't know if you can see the questions, Andy, or not. But it's a bit of a mouthful. How would you respond to that?

 

Andy Pincus:  I actually don't have those numbers at my fingertips. But, obviously, net income doesn't deal with all of the expenses that owners -- my recollection is the net income number that the RGB uses does not deal with all of the owners' expenses. And it seems to me — and we really haven't had any push-back on this from the defendants — that the most direct comparison is rent increases and what the RGB's own numbers are, with respect to cost increases. So that seems to be the most direct comparison.

 

And, obviously, net operating income has to be different because their own chart shows the rent increase number increasing at half the rate of their own cost number. So that's the reason why the net operating income number is not a number that includes all costs in. A number of costs that have increased significantly in recent years have been taxes and costs for things like water.

 

Dean Reuter:  Good. Skipping one question, we'll go back to the emergency declaration. "Is there any standard in current law defining an emergency? Under prior law, vacancy rate determined a vacancy could be declared." I guess an emergency could be declared is what he means. Under prior law, vacancy rate determined an emergency could be declared. What's the basis for this declaration? Who made it? And who keeps --

 

Andy Pincus:  The City Council of New York. The state legislature sets the sort of rules, and New York does the declaring. The city does the declaring for the applicability.

 

Dean Reuter:  Is this all five boroughs, or Manhattan?

 

Andy Pincus:  All five boroughs. Well, that's one of the issues, as I said earlier. The statute says five percent is a necessary condition for the emergency. It doesn't define the other criteria. And, frankly, New York has never defined them. And one of the things we point out in the complaint is that, just as a matter of process, there's never been a standard for what the emergency is, what these additional factors are. And not much process has gone into it.

 

Essentially, there's a census bureau study that gets done. If it shows the requisite low vacancy rate — the vacancy rate that satisfies the statutory requirement — then there's a hearing. A bunch of people testify. And that's the end of it. As I said earlier, one of the things that's quite strange is that, if you look, on a borough basis or a neighborhood basis, there are many neighborhoods where the vacancy rate is higher than five percent.

 

But, obviously, the proponents of regulation have no incentive to look at this issue on a neighborhood or area basis, because the goal, quite clearly, has been to keep the regulation in effect. In fact, when it looked like, because of Covid, that there might be a higher vacancy rate in New York — you may remember the stories about people moving out of New York — the survey was delayed and the determination was delayed because of the risk. And there were actually proposals to change the standard out of, I think, because of concern, again, of the proponents of regulation, that that standard might not be met anymore.

 

Dean Reuter:  Right. Interesting. Sticking with the audience for a while now. "Do you have any evidence that rent-regulated properties have increased in value at a lower rate than properties in unregulated markets elsewhere in the country? Is there that sort of comparative analysis?"

 

Andy Pincus:  We haven't done a comparison between New York properties and other properties. But we did do -- and again, this study is described in our complaint. And I see someone's put the link in the chat. We did do a comparison between -- in New York, which seems like the best comparison, between regulated and unregulated units, based on property tax valuations. And there is a very, very stark difference.

 

Dean Reuter:  So, within Manhattan, if you're regulated versus unregulated, you're increasing or not increasing value at a certain rate.

 

Andy Pincus:  Well, we didn't do rate. We just did a snapshot. And the snapshot was up to 50 percent difference.

 

Dean Reuter:  Right. Right.

 

Andy Pincus:  In actual, absolute value.

 

Dean Reuter:  Interesting. What are the equities? I remember in law school, which, I have to wrack my brain to remember law school. But there's this idea of coming to the nuisance if there's a property in an airport path, and there's noise. I'm wondering about people who have bought these properties, knowing there have been emergencies declared, or they came to the nuisance, basically, I suppose. Is there an aspect of that in this case at all? If I bought it ten years ago, I bought it, presumably, at the depressed price. But go ahead.

 

Andy Pincus:  Well, and there actually is an older Supreme Court case that Justice Scalia wrote the opinion for called Palazzolo, that addresses that issue. And what the Court said is, we're not going to allow takings to essentially be — they didn't use this term — but laundered, by the mere fact that somebody -- that the property has changed hands. And so we think that's a very strong argument that, again, the fact that someone buys after the regulation does not allow the government to continue to impose a regulation that would have been a taking, vis-à-vis the initial owner.

 

Dean Reuter:  Yeah. Interesting. This question goes to tax benefits, and is there an argument that can be made regarding the fact that some of the owners received very substantial tax benefits for creating or preserving rent-stabilized apartments while others get nothing for providing the same benefit?

 

Andy Pincus:  Yes. As I say, I think the tax benefit -- we are not advancing claims on behalf of people who are subject to rent stabilization because of the tax benefits we receive. These are people who didn't have a choice. They own buildings that qualify. They didn't get any countervailing tax or other benefit. They just get the burden.

 

Dean Reuter:  Yeah.

 

Andy Pincus:  And, as I say, that category is about 15 percent or so of the total apartments, so it's not negligible. But the lion's share of the people or the property owners burdened by this have not gotten any benefit at all.

 

Dean Reuter:  Yeah. Here's a fact-specific question. I'm looking at one from Edward Hockman, it looks like. And, again, Andy, I don't know if you can read these or not.

 

Andy Pincus:  Yeah. No, I have it on my screen.

 

Dean Reuter:  He says he chaired the New York City Guidelines Board for seven years, and rent regulation is a Byzantine system. First, a comment, "When I was chair, there were approximately 7,400 apartments where there were more bedrooms than tenants, usually, an elderly couple or widow whose kids had grown up and spouse had died. But it would cost the remaining spouse or couple more money to move into a smaller, less desirable unit." Talk about your unintended consequences. "My question is, what is the strongest argument which the other side has?"

 

Andy Pincus:  Well, first of all, on that comment, I think that's exactly right. And that's one of the reasons it's another one of the irrational consequences of these laws, is that people are using apartments that newcomers to New York would be more sensibly allocated to. But they can't get them. And so it's actually -- the argument is we're helping to alleviate the housing shortage. No, you're not. You're actually making it worse by having this misallocation between apartment size and tenant, and also severely disadvantaging newcomers vis-à-vis people who have been there for a while. So, again, just on the irrationality.

 

The strongest argument on the other side? I don't think -- especially posed to your point, I think they have a very hard time on the physical takings side of the equation. Even the Yee decision that said, "We're not going to find a physical taking, because you can't control who the tenant is." I just wonder how much of that survives Cedar Point's quite strong support for the right to exclude, and interferences with it being a physical taking.

 

      I guess we think we have very good arguments on the regulatory takings, the multifactor regulatory takings side. On the other hand, one interesting -- especially because we're at the motion to dismiss stage. We haven't had a chance to prove our case. The district judge said, "I don't think that you can prove a sufficient diminution of value across the board." But our view is, at the motion to dismiss stage, we certainly alleged it. And we think that is possible. Because we think — given the way the other factors weigh — the diminution in value doesn't have to be that significant. And we think we can prove a minimum that will get all of these units into the regulatory takings stage.

 

But, one of the interesting interchanges in the Cedar Point argument, where the question really was, is this California regulation going to be evaluated as a physical taking, or are we going to subject it to the multifactor regulatory takings test? And, during the argument, I think there was candor on both sides, in the lawyers on both sides basically saying, "We don't know of a lot of cases where the regulatory taking test has ever been satisfied."

 

      Now part of that is it's a multifactor test. Part of that is pre-Knick it was always state court judges doing the balancing. But I think it is the reality that that test, at least up until now, has been one that governments usually win. Because it's a multifactor test, and had been applied by state judges who may have been more reluctant to find violations.

 

So, if I were the other side, I guess I would say that's my strongest -- I would say that's their strongest argument. I still think we would prevail. But it certainly is an area where state and local governments have done very well, which is why Cedar Point is so significant in making clear that physical takings is a more expansive category than I think some people thought before.

 

Dean Reuter:  Yeah. Here's an anonymous question concerning the due process claim. "There's no means testing for the regulated apartments." That's a question.

 

Andy Pincus:  Absolutely not.

 

Dean Reuter:  You mentioned -- it feels to me like you mentioned something about including high income tenants. Was that an amendment, or has that been in place?

 

Andy Pincus:  This law has evolved in different ways. And so there were older provisions, former provisions of the law that said if the tenant's income reaches a certain level, or the rent reaches a certain level, then the controls fall off. They were separate, then they were combined. But now neither of them exist. So, in fact, you can be a millionaire or a billionaire and live in one of these apartments and get the benefit of the limitations that the law applies.

 

Dean Reuter:  That is fascinating to me. And is -- at least for the due process part of the claim, is the city -- do they have a fallback argument where they're saying, at a minimum, in terms of sort of maybe a constitutional avoidance argument, the court could only strip away that means, the evaporation of that means testing? They need to save the rest of the regulation.

 

Andy Pincus:  Well, there never was any means testing. This was sort of an outer limit.

 

Dean Reuter:  I'm using the term [crosstalk 00:56:00].

 

Andy Pincus:  What they've basically fallen back on is this neighborhood stability argument. That this is really about -- that stability of the neighborhood isn't about the property owner, it's about the tenant. And so having long continuity of tenants and this successorship right keeps things stable in neighborhoods. And they want to do that.

 

Of course, that doesn't really answer why, although it doesn't really happen very often, when the apartment becomes vacant, all of these controls should still apply. But that's been the argument that they, and the district court, ended up focusing on, I think because the other ones are so vulnerable.

 

Dean Reuter:  Right. Well, in just maybe a yes or no, if you can on this. Does this lawsuit cover the 2019 amendments, or does it cover more than that?

 

Andy Pincus:  We cover the laws that exist today. So the 2019 amendments plus the existing law. Our position is not that pre-2019 the law was constitutional. We don't think so. But the 2019 law certainly has made our case stronger because of the much more Draconian limitations that it enacted.

 

Dean Reuter:  Very good. Very good. Well, I think we're out of time here, Andy. And I want to thank you for your time and your expertise. In case, in the audience, you missed the website, it's unlawfulrentregs.com. Have I got that right?

 

Andy Pincus:  Yes.

 

Dean Reuter:  Unlawfulrentregs.com, unlawfulrentregs.com. My apologies to audience members who had questions who didn't get them answered. Maybe we can have you back, Andy, after the oral argument, or certainly at some point in the future. This is a fascinating case. I'd like to stay up on it and keep our members up on it as well.

 

Andy Pincus:  I'd be happy to. And thank you again.

 

Dean Reuter:  And to our audience, thank you for Zooming in, I guess is the right term nowadays. Keep an eye on our website and your emails for future webinars. But, until that next Zoom webinar, we are adjourned. Thank you very much, everyone.

 

[Music]

 

Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.