Rafael Cestero on What’s Next

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Mayor Zohran Mamdani got his rent freeze. Now the real estate industry is asking what comes next for the city’s rent-stabilized buildings. That question is front and center for Rafael Cestero, CEO of the Community Preservation Corporation, which bills itself as the nation’s largest federally certified lender focused on multifamily housing in low-income communities. 

Over more than three decades Cestero has worked across affordable housing finance and government, from starting out at Enterprise Community Partners to leading the city’s Department of Housing Preservation and Development under former Mayor Michael Bloomberg.

In the wake of the Rent Guidelines Board’s vote, Cestero spoke with The Real Deal about what the rent freeze means for owners, the policy changes he believes are needed to keep rent-stabilized buildings afloat and the risks if those changes are slow to come.

This interview has been condensed and edited for clarity.

The RGB vote outcome was expected, but what went through your mind when it landed?

I think the top line thought for me was, okay, now what? It’s also not the first time in recent memory that we’ve had rent freezes. Everybody thinks about this as some monumental event, but since 2016 this is the fourth rent freeze that we’ve had. The mayor campaigned on it. It is no surprise. My question for him and for everybody else is, now what?

What effect do you think the freeze will have on stabilized buildings?

I think a lot of that depends on how many more years of rent freezes we have, and what else happens. What we know today is that since 2019 values in rent-stabilized portfolios have declined, by our estimates, nearly 50 percent, and that is what it is, right? Markets change, values decline. The question becomes, where are values going to stabilize? And with [potentially] four more years of rent freezes and no relief on operating expenses, I think we will see significantly more value degradation in the rent-stabilized housing stock.

So what do we do next? In your view, what are some short-term solutions that can help improve the financial health of these buildings?

Expenses have been rising dramatically over the course of the last 10 years. Insurance costs have been a huge driver of that. To me, that needs to be both the work that the city is already trying to do to create a public insurance vehicle. I think that’s all really good and can help over a relatively short period of time. But I think we need to start having an honest conversation about the larger question of why insurance is so high in New York, and that gets down to tort reform and all of those things that I’m not an expert in but that drive how insurance companies view liability insurance in New York. 

Rent-stabilized buildings, on average, pay $4,000 per unit per year in property taxes, so the property tax system and the burden that it puts on the most important housing stock in New York City is something that we have to deal with. The state and the city really need to look at a property tax abatement that will help rent-stabilized buildings lessen that burden. A rent freeze is [also] not solving the rent burden problem that existing tenants have in rent-stabilized housing. So I think we need to really look hard at the byzantine and archaic bureaucracy that governs our rental assistance programs, our one-shot deals, the way in which tenants that get behind in the rent can get relief.

What about longer-term fixes?

At this point, we’ve achieved such a crisis that I think it’s time that we really completely rethink the system and try to take politics out of it. I think the city should push and the state should really look hard at changing the way in which rent stabilized rents are set. Other states do it differently. I think the rent guidelines board has run its useful life. I think it should be eliminated, and I think we should go to a system where rents are set to a formula. California does consumer price index plus a spread over that. I think we can look at other states that have progressive rent stabilization laws that protect tenants, but also provide a rational way for rents to be able to rise and for private capital to be able to flow into the system so that buildings can get maintained. 

What is the data telling you about the state of these buildings and the risks ahead?

What I continue to be most concerned about are buildings where 90 percent of the units or more are rent stabilized. The biggest thing that jumped off the page to me in our most recent data brief on operating expenses was that repairs and maintenance have only gone up by 1 percent. If you think about that in the reality of inflation that means repairs and maintenance overall have declined. That’s the leading indicator of physical distress. 

The other thing that I would pay a lot of attention to is how private capital is changing how it’s underwriting new investments. If lenders start underwriting at 0 percent rent growth and 5 percent expense increases, that will dramatically shrink the available private capital in the marketplace for repairs, to do acquisitions for new owners, to refinance out of existing debt, and that’s going to strangle the system. 

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