Economists say that tontines create perverse incentives. A tontine is an investment pursuant to which each participant puts a certain amount of money into a pot. The money in the pot is invested in whatever the participants want it to be invested in (biotech companies say, or swamp land in Florida). The money stays in the pot and accumulates current income and capital gain until all but one participant dies. The survivor collects whatever is in the pot after the second-longest-lived participant dies. A movie, The Wrong Box, was made about tontines. I believe that the Marx brothers set up a tontine, and that Harpo cashed it in.
A tontine is similar to a viatical settlement or a life insurance fund in that in these cases, death is the realization event. In a viatical settlement, a person sells the right to collect on his or her life insurance proceeds in exchange for a discounted up-front fee. A life insurance fund is a fund that holds a bunch of viatical settlements. In all of these cases, there is a temptation for participants to manage their investment actively. Why wait around for the insured life, or for your brother, to be hit by a bus? Why not encourage him to eat fatty foods, forego exercise, smoke, ignore seatbelt and helmet laws, drive too fast, not get vaccinated, not wear a face-mask in crowded indoor spaces and have unprotected sex with strangers several decades younger than him? That is the best way to turbo-charge your investment.
The road to hell is paved with unintended consequences. One example is rent control laws. A common effect of rent control laws is shrinkflation. Shrinkflation is when a seller increases the price of what they sell by keeping the unit price constant but decreasing the value of the unit. If prices go up, a baker might keep the price of his rolls the same, but he might decrease their unit weight from, say, six ounces to five. A bagel seller might change the ratio in his lox spread to include more cream cheese and less salmon. A mobile home park owner might skimp on fixing potholes or sewer lines. A park that had offered trash removal might require residents to cart away their own garbage.
When expenses increase, revenue will find a way to increase, like nature abhors a vacuum, water finds a level or goo finds a crevice.
Another effect of rent control is mandated rent increases. If a land-owner doesn’t use the maximum rent increase allotted for a year, she loses it. So, in a rent-controlled environment, rents will go up every year, without exception. That is why every park owner in every county of New York has raised lot rents by at least three percent each year since rent control laws went into effect in June of 2019. Even park owners who would not raise lot rents, other things being equal, have raised them. That is because they know that, if they do not use their annual allotment of revenue increase, they will lose it. This means that a law that has the intent of curbing rent increases creates an incentive for property owners to do the opposite.
The law of unintended consequence is turbo-charged when rules shift. When rent control laws change, there is a mass rush to the higher deck of the listing ship. Everyone wants to raise rents before a new rent control law goes into effect. That’s why legislators try to keep them under wraps while they write them. It would be a clear conflict of interest if a legislator who owned rental properties jacked up rents in his buildings shortly before he sponsored a rent control bill. But what happens when a forthcoming change in law is public knowledge that percolates slowly through the marketplace? Surely some hanky-panky is at hand.
Under current law, owners of mobile home parks in New York State can raise rents by three percent as of right each year. Rents can be increased by up to six percent in certain years, provided the additional three percent does not exceed the amount of increased operating costs or capital improvements during the current year. If a rental increase exceeds three percent, residents have three months to challenge it. If the increase is challenged, the owner may be required by a court to show his books and records to prove that the increase is needed to offset capital expenditures or augmented operating costs.
Bill A. 6755-C/S. 6199-C (the “bill”) passed the New York State Assembly this year and made it to the Senate Rules Committee before the regular legislative session ended. In relevant part, the bill does two things. First, it tightens the requirement that park owners justify rent increases beyond three percent. Second, it restricts the universe of transactions that can be used to justify rent increases in excess of three percent. Under the bill, only increases in operating costs such as taxes, wages and insurance can justify a rent increase. Capital improvements are deemed not to be increased costs, because they should be amortized over the course of their economic lives. So, if you spend a chunk of money paving roads or replacing Orangeburg or clay septic pipes, you are out of luck. Their depreciation over the previous thirty years was just a current operating cost. You can not increase lot rents over the statutorily-mandated three percent to cover it.
That is crazy in any economic environment. When the CPI is greater than nine percent, it is a suicide mission.
I understand that the bill was not passed during the regular legislative session, but that it will resurface on the legislative agenda in the future, like the Terminator, or a new variant of Covid.[1] So readers should be on notice. If you are planning on making capital improvements, hurry up and make them this year. Pave your roads! Fix your septic tanks! Install curb-stops! If your residents grumble about lot rent increases, tell them that the legislature mandated the increase. Unless the sponsors of the bill are shot by a jealous husband or get hit by a bus, your ability to pay for capital improvements might be taken away in 2023.
[1] The recent redistricting might reduce the current super-majority in the state Senate. However, it will not affect district lines in the Assembly. National polarization might result in blue-sate legislatures getting bluer and red-state legislatures getting more toxically red. So a loss of the current Democratic super-majority in both houses of the state legislature might not be possible.