NY Landlords Fight As Rent Refunds Loom

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Published on Saturday, 14 March 2009

Written by Charles V. Bagli, NY Times

The real estate industry in New York City is mobilizing with an intensity not seen in years as it faces an almost unheard-of possibility: a court order that it may have to return hundreds of millions of dollars in rent.

The state appeals court decision bars New York City landlords from deregulating apartment rents while receiving a popular tax break meant to encourage building renovations. Industry officials say the decision could affect as many as 80,000 apartments in the city, trigger widespread defaults on loans, eliminate construction jobs and reduce property tax revenues for the city.

"We all understand that this would be disastrous," said Joseph Strasburg, president of the Rent Stabilization Association, a group representing 25,000 property owners and managers.

Tenant advocates said the real estate industry was exaggerating the impact of the decision. The problem is not the decision, but the landlords who misinterpreted state law, they said.

The Appellate Division of the State Supreme Court ruled on March 5 that the landlord for Stuyvesant Town and Peter Cooper Village, adjoining complexes with 11,232 apartments on the East Side of Manhattan, had improperly deregulated more than 3,000 apartments and raised rents beyond prescribed levels, while receiving special property tax breaks from the city.

A lawyer for the tenants who brought the suit estimated that the decision could cost the landlord, Tishman Speyer Properties, more than $200 million if it is forced to repay tenants for improper rent increases over the last four years.

But the consequences extend far beyond Stuyvesant Town.

The tax breaks, known as the J-51 program, have been given to thousands of landlords, large and small, for building renovations. If the ruling stands, any landlord who deregulated rents after receiving the tax exemptions might have to repay tenants for rent overcharges.

On Thursday afternoon, Tishman Speyer filed a motion asking the Appellate Division for permission to take the case to the Court of Appeals and to hold off carrying out the decision until there is a final resolution.

The court granted the stay on Friday, but put off deciding whether to allow the appeal. It also said that starting in April, Tishman Speyer must put into an interest-bearing escrow account the difference between the rent it charged for the affected apartments and the rent it would have charged if the apartments were still subject to rent regulations.

There are about a million apartments with regulated rents in New York City. Under state law, landlords can deregulate an apartment when the rent for a vacant apartment reaches $2,000 or more per month, or the rent is above $2,000 and a tenant's household income is above $175,000 for two consecutive years. Once deregulated, the landlord can raise the rent to market rate.

But in cases where landlords make significant building renovations, they are allowed to pass along a portion of the renovation costs to the tenants' rent. As a result, landlords can raise rents that exceed or approach the $2,000 deregulation threshold.

The Bloomberg administration, which had supported Tishman Speyer's record-breaking $5.4 billion purchase of Stuyvesant Town in 2006, has not taken a position on the case.

The court decision has also intensified the real estate industry's opposition to proposed legislation in Albany that would expand rent regulations and severely undercut building owners' abilities to raise rents quickly. Tenant advocates, citing skyrocketing rents and the loss of housing for poor and working-class tenants during the real estate boom, have made a concerted effort to lobby elected officials to strengthen the regulatory system.

A package of 10 pro-tenant bills was approved by the State Assembly earlier this year and sent to the Senate, where landlords have focused their lobbying efforts. In the past, the real estate industry depended on Republican leadership in the Senate - which the Democrats now control, by 32 to 30 members - or a sympathetic Republican governor to block such bills.

"Everybody's worried," said Steven Spinola, president of the Real Estate Board of New York, the industry's influential lobbying arm. "This is legislation that'll ruin housing and ruin investment."

Mr. Spinola was in Albany two weeks ago, lobbying the Senate majority leader, Malcolm A. Smith; Senator Pedro Espada Jr. of the Bronx; Senator Dean G. Skelos of Long Island, the Republican minority leader; and others. This week, members of the Community Housing Improvement Program, an association representing apartment building owners in the city, made their own lobbying trip to Albany.

Mr. Strasburg, of the stabilization association, has called for an industry summit meeting in April. His group is also appealing to building contractors and unions that it says would lose work if landlords stopped renovating their buildings because of the proposed legislation or the court decision.

"All of a sudden, people who had dropped off the face of our earth have re-emerged and seen the seriousness of this," Mr. Strasburg said.

Tenant advocates say that hundreds of thousands of formerly rent-regulated apartments have been converted to luxury rentals over the past decade, contributing to a housing crisis in New York. Michael McKee, treasurer of the Tenants Political Action Committee, said he argued 12 years ago that the state was improperly allowing landlords of buildings receiving J-51 tax breaks to deregulate apartments and raise rents.

"The tenant movement has never been more united," Mr. McKee said.

It was the 2006 sale of Stuyvesant Town, a traditionally working- and middle-class enclave where more than three-quarters of the apartments were rent-regulated, that galvanized tenant advocates. Tishman Speyer's purchase was based on the idea that it could profit by removing apartments from rent stabilization after significant renovations.

But tenants facing rent increases of 20 to 30 percent filed a lawsuit in 2007 arguing that Tishman Speyer had no right to deregulate apartments in buildings that had received $24.5 million in tax breaks since 1992 under the J-51 program.

The program was designed to encourage landlords to make building improvements.

The State Supreme Court initially dismissed the case, but the Appellate Division ruled in the tenants' favor, seriously undercutting Tishman Speyer's ability to increase revenues from the complexes. The company was already under financial pressure from bondholders because the process of converting apartments to market rates has gone more slowly than expected.

If the court decision stands, apartments that had been improperly deregulated would again be subject to rent regulations and landlords would have to repay tenants for rent increases that exceeded annual increases set by the Rent Guidelines Board over the past four years. In some cases, the law allows tenants to seek triple damages.

Many large landlords contend they relied on the guidance of the state's housing agency when they deregulated apartments. But the Appellate Division also relied on documents from the housing agency, as well as state law. Indeed, the state Division of Housing and Community Renewal, in a 1995 operational guideline, insisted that buildings receiving tax breaks could not be deregulated.

Last week, the Division of Housing and Community Renewal advised tenants on its Web site to file complaints against their landlords for rent overcharges if they think they were affected by the court decision.

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