A Dastardly Clever SchemeAt a faculty lunch yesterday, I heard about an ingenious scheme used by some universities in New York, where much rental housing is rent controlled. Here are the three key elements, as it was described to me by one of my colleagues:
1. The university buys a rent-controlled building. The purchase price is low, because the existing landlord cannot make much money renting it.
2. The university then rents the apartments to its own senior faculty, who view this as a great perk. In essence, the difference between the free-market rent and the controlled rent is a form of compensation for the professor. As a result, the university can reduce the professor's cash compensation by an equivalent amount. The university is effectively earning the market rent for the apartment.
3. But it gets even better. The implicit rental subsidy is a form of non-taxed compensation. Normally, if an employer gives an employee a perk like this, the subsidy is taxable income (unless the perk is deemed a working condition required to do the job, like a hotel manager living in a hotel). But here, the university can claim there is no subsidy: It is only charging what the rent-control law requires. Because of this tax treatment, the implicit subsidy is worth even more to the professor than the equivalent cash compensation. This fact allows the university to reduce the professor's cash compensation by an even greater amount. Thus, the university effectively earns even more than the free-market rent on a real estate investment purchased much lower than the free-market price would have been.
In the end, the goal of the rent control laws is thwarted (the low rents are enjoyed by well-paid tenured faculty rather than the needy), the income tax laws are thwarted (a sizable part of compensation is untaxed), and all this is done by a nonprofit institution (the university) whose ostensible purpose is to serve the public interest.