Tishman Speyer Properties and other owners of rent-regulated buildings suffered an enormous blow Thursday when the Appellate Division of New York’s Supreme Court unanimously ruled buildings receiving certain tax benefits could not deregulate apartments.
The decision is devastating because it derails the business plans of owners like Tishman Speyer, who purchased rent-regulated complexes with an eye towards deregulating units and boosting rents to market rents in order to pay off their mortgages. Tishman Speyer is already having major financial problems at Stuyvesant Town/Peter Cooper Village, the sprawling complexes which it purchased in 2006 for $5.4 billion, because it hasn’t been able to covert units fast enough. In January, Fitch Rating said the company had only six months of reserves remaining to cover the trust portion of the debt on the property.
Thursday's court decision stems from a 2007 case tenants brought against Tishman Speyer alleging that rents on their apartments had been improperly deregulated. A lower court judge had dismissed the case.
More importantly, the judges ruled that units must remain rent regulated as long as the building’s owner is receiving J-51 tax benefits. Sty Town and Peter Cooper Village are slated to receive such benefits until 2017.
In a statement, Tishman Speyer said it is convinced that the initial decision to dismiss was the correct one and that "we intend to continue to pursue all potential appeals and defenses."
“This is not just bad for Stu Town it is very bad for all New York City real estate,” said Frank Ricci, director of government affairs for the Rent Stabilization Association.
Mr. Ricci said the ruling will cause an administrative nightmare because landlords could be required to go back and regulate apartments. He noted the decision will also hurt the city’s finances because landlords’ taxes are based in part on rent rolls.
Tenant lawyers were ecstatic, however. Seth Miller said that even if the case is eventually throw out on some technical reasons, the ruling on the status of rent regulated units will hold.
Tishman Spyer can try to appeal the ruling but that won’t happen automatically because the decision was unanimous.
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Tenants at Stuyvesant Town and Peter Cooper Village, the sprawling middle-class apartment complexes on the East Side of Manhattan, won a major victory over their landlord on Thursday when an appeals court ruled that the company had wrongfully raised rents and deregulated thousands of apartments after receiving special tax breaks.
The decision, issued by the Appellate Division of State Supreme Court in Manhattan, could ultimately cost the landlord, Tishman Speyer Properties, $200 million if it is required to repay residents of more than 3,000 apartments for improper rent increases over the past four years, said a lawyer for the tenants.
Landlords say the decision could also affect hundreds of other apartment house owners who, like Tishman Speyer, obtained tax breaks under the city’s J-51 tax program for property renovations and then raised rents beyond certain set levels. The Appellate Division ruled that apartments must remain rent-regulated as long as the building owners enjoy J-51 tax benefits.
After watching many rent regulations wither away over the last two decades, tenant advocates were thrilled with a decision in their favor.
“It’s a good thing for the tenants and for affordable housing,” said Alvin Doyle, president of the Stuyvesant Town-Peter Cooper Village Tenants Association.
Tishman Speyer, which bought the two complexes in late 2006 with BlackRock Realty for a record-breaking $5.4 billion, issued a statement Thursday evening saying that it would "continue to pursue all potential appeals and defenses."
The prospects are not bright. The company must ask the Appellate Division for permission to take the case to the State Court of Appeals. If not, it has few other remedies.
Tishman Speyer’s business plan for Stuyvesant Town and Peter Cooper Village presumed that they could increase profits by replacing rent-stabilized residents with much-higher-paying tenants after renovating and deregulating the apartments. Under state law, an apartment can be deregulated after it becomes vacant and is renovated, or if the rent reaches $2,000 a month.
State law restricts rent increases for regulated apartments but not for deregulated ones.
Over the last year, Tishman Speyer has come under financial pressure from lenders and bondholders. There is a wide gap between the rental income at the properties and the monthly loan payments, and the company has been unable to convert apartments to market rates as quickly as it had projected.
Tenants at Stuyvesant Town filed the lawsuit in 2007, arguing that Tishman Speyer and the previous owner, Metropolitan Life, were prohibited from removing apartments from rent regulation and imposing large rent increases because the complexes had received $24.5 million in tax breaks since 1992 under the J-51 program. The state and the city had allowed landlords to deregulate more than 3,000 of the 11,200 apartments in the complexes.
A popular program with landlords, J-51 was intended to encourage owners to refurbish their properties and make capital improvements.
The Appellate Division ruling overturned a lower court decision that had favored landlords.
“It is time for the owners of Stuyvesant Town and Peter Cooper Village to sit down with residents of the complex to resolve this dispute over rent overcharges in a fair and equitable manner,” said the Manhattan borough president, Scott M. Stringer, who had filed a brief in the case on behalf of the tenants.
But Joseph Strasburg, president of the Rent Stabilization Association, which lobbies on behalf of landlords, said the decision could have a devastating impact on many landlords in all parts of the city who had relied on the state housing agency’s interpretation of the law regarding J-51 tax breaks. Landlords may have to give back thousands of dollars in rent, which in turn, could lead to lower building values and a drop in tax revenues for the city.
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Faulting a Manhattan judge's interpretation of the rent-stabilization laws, a state appeals court has reinstated a $200 million class action brought by a group of tenants who claim the landlord of Stuyvesant Town and Peter Cooper Village illegally deregulated their rent-stabilized apartments.
The suit, filed on behalf of Amy L. Roberts and other tenants, alleged the defendants, including Tishman Speyer Properties, L.P., whose general partner, PCV ST Owner L.P. bought the housing complex for approximately $5.4 billion in 2006, charged rents above the rent-stabilization levels while receiving tax breaks for improving the buildings in violation of the luxury decontrol provisions of New York rent-stabilization laws.
Reversing Manhattan Supreme Court Justice Richard B. Lowe's dismissal of the suit, the Appellate Division, First Department, unanimously held in Roberts v. Tishman Speyer Properties, L.P., 4165, that Tishman Speyer could not deregulate the units while receiving J-51 tax abatements, regardless of whether the apartments became subject to rent stabilization solely as a result of the tax breaks or for one or more reasons in addition to the landlord's participation in the J-51 program.
Justice Eugene Nardelli (See Profile) wrote for the panel.
Built in the 1940s to provide affordable housing for middle-income families, the 110-building, 11,200 unit complex spans 10 city blocks between First Avenue and Avenue C, and 14th and 23rd streets.
In January 2007, the plaintiffs sued Tishman Speyer, and PCV ST, which purchased the complex from Metropolitan Tower Life Insurance Co., a codefendant in the suit and the successor by merger to defendant Metropolitan Insurance and Annuity Company.
They claimed that more than 25 percent, or approximately 3,000 units, which have been subject to the Rent Stabilization Law since 1974, have been illegally deregulated. In addition to seeking rent overcharges for four years, the tenants sought a declaration that their apartments would be subject to rent stabilization, so long as the defendants receive J-51 benefits.
Under the Rent Regulation Reform Act, units are excluded from rent regulation in certain circumstances, including when the legal regulated rent is $2,000 or more or if household income exceeds $175,000 for two years in a row. However, the decontrol exclusions do not apply to housing that became rent regulated "by virtue of receiving" tax benefits, such as abatements under the J-51 program.
Since 1992, Metropolitan Life and the successor owners of Stuyvesant Town and Peter Cooper Village have received approximately $24.5 million in J-51 tax breaks.
On Aug. 24, 2007, Justice Lowe (See Profile) dismissed the tenants' suit (NYLJ, Aug. 24, 2007).
He relied on a 1996 letter issued by the New York State Division of Housing and Community Renewal (DHCR), which concluded that the phrase "by virtue of" in the luxury decontrol provisions means that an owner "is precluded from seeking Luxury Decontrol of a housing accommodation receiving 'J-51' tax abatement benefits only where the receipt of such benefits is the sole reason for the accommodations being subject to rent regulation."
"Having become subject to rent stabilization in 1974 . . . 18 years before applying for J-51 tax benefits, defendants did not become subject to rent stabilization by virtue of receiving tax benefits," Justice Lowe said.
The First Department disagreed with Justice Lowe's construction of the rent-stabilization law.
The amount of deference afforded to the interpretation of a statute offered by the administrative agency charged with implementing a statute depends on the degree to which the interpretation relies on the agency's special competence or expertise, Justice Nardelli wrote.
"Since, in this matter, the interpretation of the provisions in question requires no special competence, or understanding of underlying practices on the part of the DHCR, we find unavailing defendants' reliance on the DHCR's regulations and opinion letter and conclude that the agency's construction of the statute is not entitled to deference," he wrote.
Noting that the parties agreed that "by virtue of" means "because of" or "by reason of," Justice Nardelli concluded, "it is clear to us that such phrase does not, in ordinary language mean that only a single cause or reason exists.
"Indeed, the Legislature, in numerous instances, has not hesitated to use the phrases 'only by virtue of' or 'solely by virtue of' when it intended to restrict a provision to a single cause," he wrote.
Justice Nardelli pointed out it would "invite absurd and irrational results" to limit the scope of high-rent exception - in effect, treating owners differently based on the timing of a tenant's departure.
"Since there is no basis for limiting the scope of the exemption, the motion court's insertion of the word 'solely' into the regulations implementing the statute was impermissible," he wrote.
Justices Luis A. Gonzalez (See Profile), Rolando T. Acosta (See Profile), and Leland G. DeGrasse (See Profile) joined the panel, which heard arguments on Sept. 11, 2008.
Mr. Schmidt called the ruling "an important victory" not only for "our individual clients and the thousands of other tenants" at Stuyvesant Town and Peter Cooper Village, but for "tenants throughout the city."
Jay B. Kasner, Scott D. Musoff and Christopher R. Gette of Skadden, Arps, Slate, Meagher & Flom and Sherwin Belkin and Magda Cruz of Belkin Burden Wenig & Goldman represented Tishman Speyer and PCV ST.
In a statement, Tishman said, "We remain firmly convinced that Justice Lowe's decision to dismiss was the correct one. We intend to continue to pursue all potential appeals and defenses."
Daniel J. Ansell and Steven Kirkpatrick of Greenberg Traurig represented Metropolitan Insurance and Annuity Company and Metropolitan Tower Life Insurance Company. Mr. Ansell did not return a call for comment.
The Community Housing Improvement Program Inc., Small Property Owners of New York Inc., Rent Stabilization Association of NYC Inc., the Legal Aid Society, and Office of the Manhattan Borough President served as amici curiae to the tenants.
In a statement, Manhattan Borough President Scott M. Stringer wrote, "It is time for the owners of Stuyvesant Town and Peter Cooper Village to sit down with residents of the complex to resolve this dispute over rent overcharges in a fair and equitable manner."
The landlord at Stuyvesant Town and Peter Cooper Village, the vast apartment complexes on Manhattan’s East Side, got a reprieve Friday afternoon when the Appellate Division of the State Supreme Court suspended a court decision that it had improperly charged high rents for thousands of apartments. The landlord requested the stay so that it could try to appeal the case.
The court ruled unanimously on March 5 that the landlord, Tishman Speyer Properties, had wrongfully deregulated more than 3,000 apartments and hiked rents beyond certain set levels, while receiving property tax breaks from the city.
Tishman Speyer asked the Appelate Division Thursday for permission to take the case to the Court of Appeals and for a stay. A lawyer for the tenants who filed the case said the ruling could ultimately cost Tishman Speyer $200 million if it is required to repay residents for improper charges over the past four years.
The decision could also affect landlords of as many as 80,000 apartments who, like Tishman Speyer, obtained tax breaks from the city’s J-51 tax program for property renovations, deregulated apartments and charged improper rent increases.
The Appellate Division agreed to hold off on implementing the decision until it considered whether to allow the appeal. The court put off deciding whether to allow the appeal, giving both sides until the end of the month to file papers on the matter.
In the meantime, the court said that Tishman Speyer should calculate the difference between the current rents and what it should have charged if the apartments were subject to rent regulations. Starting with rents collected in April, the court also directed Tishman Speyer to put the difference between the two numbers into an interest-bearing escrow account.
The ruling was embraced by tenant advocates who have decried the loss of housing affordable to poort and working class tenants, but shook up the real estate industry. The Rent Stabilization Association, the Community Housing Improvement Program and the Small Property Owners of New YOrk, have filed briefs in court on behalf of Tishman Speyer.
The Bloomberg administration, which had supported Tishman Speyer’s $5.4 billion purchase of the Stuyvesant Town in 2006, has decided not to take a position on the case.
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.
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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March 14, 2009 | 10:07 a.m.
It seems the far-reaching impacts of last week’s tremendous Stuyvesant Town/Peter Cooper Village court ruling will wait some time to take effect.
A court on Friday gave Stuy Town landlord Tishman Speyer a stay in having to take any actions after the decision last week, waiting until the results of an appeals process are borne out. Tishman Speyer has applied to appeal to the state’s top court, the Court of Appeals. A state appellate court dealt the powerful landlord, as well as the owners of tens of thousands of other apartments citywide, a major blow that could cost them hundreds of millions -- if not billions -- of dollars, ruling that many landlords had been improperly converting rent-stabilized apartments to market-rate units.
Rather than immediately re-regulate the 4,000-plus apartments in Stuyvesant Town that have been converted to market rents since 1993, as the appellate court’s decision would require, the stay calls for Tishman to calculate how much money it would owe in back rent to market-rate tenants and put that money in an escrow account.
The attorney that brought the case against Tishman Speyer estimates the landlord could owe tenants around $200 million, a number based on incomplete data -- a very big number for a landlord whose $400 million cash reserve account for Stuy Town was rapidly depleting and predicted to run out mid-year.
For Tishman Speyer, other landlords and affected tenants, the court decision last week landed like a bombshell. Landlords who had been receiving modest tax abatements thorough a renovation incentive program, J-51, suddenly were told they were not allowed to have deregulated rent-stabilized units, a practice many had been doing for over 15 years. The state agency that oversaw rent regulation even had guidelines saying that landlords were within their rights to deregulate those apartments.
Further, tenants would be allowed to collect back rent from the landlords, as if their apartments had stayed rent stabilized, and their apartments would be re-regulated.
Now, following the unanimous decision at the appellate court, landlords and tenants are searching for direction. Already, other tenants in Stuyvesant Town have sued Tishman Speyer seeking back rent payments, a case brought by tenant lawyer Jack Lester and the Stuyvesant Town tenants association. That case calls for damages of no less than $10 million.
If landlords were suddenly liable for hundreds of millions of dollars in addition to being unable to count on a large cash flow, as the apartments would be re-regulated, many landlords would clearly come a step closer to default, particularly those who bought at the peak of the market on optimistic assumptions, as did Tishman Speyer.
The appellate court must rule on whether or not Tishman Speyer has the right to appeal to the Court of Appeals. Then, the Court of Appeals would have to decide to hear the case.
After 23 years in Stuyvesant Town, Ken Chanko and his family dreaded the idea of leaving. But with the end of rent regulation for their three-bedroom apartment looming, Mr. Chanko knew there was no way they could afford to stay.
That could change. Two weeks ago, a state court effectively barred landlords from deregulating apartments in buildings that receive certain tax breaks. Less than a week later, Mr. Chanko filed a lawsuit against his landlord, Tishman Speyer, demanding a renewal lease at a rent-stabilized rate.
For landlords, it could well become an albatross if, as expected, thousands of tenants follow Mr. Chanko's lead. Meanwhile, landlords are terrified that the ruling will not only stop deregulation, but will also force many units back into regulationa move that would require landlords to make retroactive rent refunds to thousands of tenants.
By most estimates, the ruling could cost New York landlords hundreds of millions of dollars.
The landlords' nightmare started two weeks ago, when the Appellate Division of New York's Supreme Court ruled that apartments in buildings that receive J-51 tax abatements must remain rent-regulated.
The decision stemmed from a 2007 case brought by residents of Stuyvesant Town and Peter Cooper Village, who alleged that Tishman Speyer and previous landlord Metropolitan Life illegally deregulated apartments and wrongfully raised rents while receiving the tax benefits awarded for building improvements. However, Tishman Speyer was following standard industry practice.
Tishman Speyer, which declined to comment, filed last week to request a stay and an appeal. The appeal may not be granted, since the court's decision was unanimous. If the decision stands, it could cost Tishman Speyer $200 million in rent refunds.
The threat comes at a time when the sprawling complex is already losing money. In 2006, Tishman Speyer paid $5.4 billion for the buildings, with an eye toward quickly deregulating rents to help pay off debt. That effort has gone far more slowly than expected, forcing the complex to burn through millions of dollars it held in cash reserves. In January, Fitch Ratings said the company had only six months of reserves remaining for a crucial portion of the debts on the property.
While Tishman Speyer may be the biggest victim of the court's decision, it's not alone. At this early stage, divining which landlords might suffer is difficult, but industry insiders note that Westbrook Partners, Parkoff Management and Laurence Gluck may feel an impact. Westbrook already lost a case in which it attempted to deregulate an apartment in a building with a J-51 tax benefit. Westbrook and Parkoff executives couldn't be reached for a response. Mr. Gluck had no comment.
About half of the city's 2 million rental apartments are regulated. Apartments can be deregulated for several reasons, but the majority leave the system when they are vacated and their rents have hit $2,000 a montha ceiling that limits the impact largely to Manhattan.
Andrew Hoffman, who owns three buildings with a total of 700 units that might be affected, says it is too soon to determine the effects of the ruling, especially since it could be overturned.
If Mr. Chanko's class-action lawsuit succeeds, tenants will have that right. Jack Lester, Mr. Chanko's lawyer, says that since the ruling, he has received about a dozen calls from tenants seeking advice.
Ironically, the potential number of renters involved and the sheer complexity of sorting out their compensation claims for back rent could ultimately work in landlords' favor.
“If it is too complicated, people won't apply,” says Michael McKee, treasurer of the Tenants Political Action Committee.
He also cites city statistics showing that rent-regulated buildings enjoy an average operating profit margin of 37%.
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Stay of court order to roll back rents leaves both sides claiming victory.
Tenants whose apartments were about to lose their rent-regulated status hope that a court order issued last week will give them a reprieve from huge rent hikes that would force them to leave their homes.
The order stems from a decision earlier this month by the Appellate Division of New York’s Supreme Court which barred apartments in buildings that receive J-51 tax abatements from being deregulated. The ruling resulted from a case brought by residents of Stuyvesant Town and Peter Cooper Village in 2007. They alleged that Tishman Speyer and previous landlord Metropolitan Life illegally deregulated apartments and wrongfully raised rents while receiving the tax benefits, which are awarded for making building improvements.
Tishman Speyer, which was following standard industry practice in deregulating rents, last week filed a motion to appeal the case. It also filed a stay to prevent the decision from being carried out. The court granted the stay, which means that Tishman Speyer wouldn’t have to make rent refunds, but didn’t rule on the appeal. If the ruling does stand, one lawyer estimated that Tishman Speyer would have to pay $200 million in rent refunds.
Tenant attorney Jack Lester maintains that, theoretically, the stay is good news for tenants because it implies that Tishman Speyer should be barred from deregulating apartments while the issue is being litigated, although that point wasn’t directly stated. He noted that the original case and the stay refer to market-rate tenants, not to those who are about to lose their rent regulated apartments.
Mr. Lester filed a lawsuit on behalf of two clients demanding that Tishman Speyer grant them lease renewals at rent-stabilized rates because of the initial court ruling. He is seeking class-action status for the suit.
Mr. Lester says that Tishman Speyer’s attorneys have indicated they don’t agree with his reading of the ruling but hopes they can work out an agreement. He adds that an agreement would also need approval by the state because it carries out deregulation orders.
Mr. Lester’s case is slated to be heard by the court next week. Tishman Speyer attorneys declined comment.
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Agreement involving Tishman Speyer covers higher earning renters in some buildings.
Some tenants who were about to lose their rent-regulated apartments because of their salaries have been granted a reprieve.
The agreement to suspend what are known as high-income deregulations comes in the aftermath of a decision earlier this month by the Appellate Division of New York’s Supreme Court, which ruled that apartments in buildings that receive certain tax benefits must remain rent regulated. That decision stemmed from a 2007 case brought by residents of Stuyvesant Town and Peter Cooper Village, who alleged that Tishman Speyer and previous landlord Metropolitan Life, illegally deregulated apartments and wrongfully raised rents while receiving J-51 tax benefits, which are awarded for building improvements. However, Tishman Speyer was following standard industry practice.
In the wake of that ruling, tenants’ lawyer Jack Lester filed a lawsuit demanding renewed leases at rent-stabilized rates for two clients whose apartments were about to lose their rent-regulated status. Mr. Lester claimed it was inappropriate to deregulate such apartments when the court ruling essentially said they should remain stabilized. However, Tishman Speyer is hoping to have the ruling overturned on appeal. The big landlord has filed a request for an appeal but the court has not decided whether to grant it.
Mr. Lester and lawyers for Tishman Speyer and the New York State Division of Housing and Community Renewal agreed to halt high-income deregulations while the court case continues. DHCR is in charge of deregulating apartments. Under state law, apartments can be deregulated when the monthly rent hits $2,000 a month and the tenant has earned $175,000 annually for two years.
Mr. Lester believes the agreement he reached should cover all tenants in rent stabilized buildings with J-51 tax benefits. A spokesman for DCHR didn’t have an immediate comment.
Tishman Speyer Properties purchased Stuyvesant Town and Peter Cooper Village in 2006 for $5.4 billion with the intention of quickly deregulating apartments to pay off debt. However, it hasn’t been able to change the status of many of the apartments and is losing money on the massive deal.
Landlord for Stuy Town and Peter Cooper Village granted right to appeal potentially costly court decision on deregulating apartments while receiving tax abatements.
Tishman Speyer Properties won a huge victory Monday when it was granted the right to appeal a decision that found it had been illegally deregulating rents at Stuyvesant Town and Peter Cooper Village.
Monday’s decision means Tishman Speyer will take the closely watched case to the New York State Court of Appeals with the hope of reversing a ruling that would have cost it and other landlords hundreds of millions of dollars.
The Appellate Division of New York’s Supreme Court last month ruled that Tishman Speyer, and the complexes’ former owner, Metropolitan Life, should not have been deregulating apartments while receiving J-51 tax abatements, which are given for making building improvements. That ruling would have essentially required Tishman Speyer and other landlords to re-regulate apartments and pay tenants the difference between the market rents they were paying and the regulated rates.
The Appellate Division had to agree before Tishman Speyer could appeal further because its ruling last month was unanimous.
The lower court ruling could prove to be an administrative and financial nightmare for Tishman Speyer and other landlords. Lawyers representing tenants at the two sprawling complexes on the East Side of Manhattan estimate that Tishman Speyer alone would have had to pay $200 million in rent refunds.
Tishman Speyer said in a statement it was pleased the motion to appeal was granted and that it looked forward to the Court of Appeals ruling on the issue.
The tenant’s lawyer, Alexander Schmidt, says he is “fully confident we will prevail on appeal” and hopes the Court of Appeals will hear the case as early as June.
City Councilman Dan Garodnick, who represents the district that is home to the two complexes, said in a statement he is confident that the Court of Appeals will uphold the lower court’s decision.
The landlord of Stuyvesant Town and Peter Cooper Village got judicial permission on Monday to appeal a court ruling that it must repay certain tenants millions of dollars in rent overcharges at those complexes.
The issue will now go to the state’s highest court, the Court of Appeals.
On March 5, the Appellate Division of State Supreme Court ruled that the landlord, Tishman Speyer Properties and BlackRock Realty, had wrongfully deregulated thousands of apartments and raised rents beyond certain set levels at the two Manhattan complexes while receiving special tax breaks from the city.
The Appellate Division notified lawyers in the case on Monday that it would allow the landlord to appeal that ruling to the Court of Appeals. The decision’s implications go far beyond the two complexes and could affect hundreds of other landlords in the city and tens of thousands of apartments.
The Appellate Division held that landlords who received the tax breaks under a program designed to encourage renovations in many buildings could not deregulate any apartments in those buildings.
Much of the real estate industry has supported claims that the decision would spur widespread defaults on loans and a drop in property tax revenues for the city.
Alexander H. Schmidt, the tenants’ lawyer, said that he was “very confident that the decision will be upheld.” The Appellate Division also granted a stay of its decision, but has required the landlord to put the difference between the rent it charged at 4,400 apartments and the rent it would have charged were the apartments still subject to regulation in an interest-bearing account.
by Seth A. Miller, Esq.
Any tenant who lived in a building that received J-51 benefits during his or her tenancy is potentially rent regulated.
To find out whether a building received or receives J-51 benefits, go to www.nyc.gov/html/dof/html/property/prop ... j_51.shtml .
Any tenant that moved into a building as a supposedly deregulated tenant might instead be rentstabilized, if either (a) the building is now getting J-51 benefits, or (b) the building used to get J-51 benefits during the tenancy of the current tenant, and the tenant did not get notice, in the first lease and in every renewal, saying that the apartment can be deregulated when the benefits expire. In addition, a stabilized tenant might be exempt from high-income deregulation if either (a) the building is now getting J-51 benefits, or (b) the building used to get J-51 benefits during the tenancy of the current tenant and the tenant did not get notice, in the first lease and in every renewal, saying that the apartment can be deregulated when the benefits expire.
Tenants who would be in these categories but who have left their supposedly deregulated apartments are affected too: if they left less than four years ago, they can sue for overcharges.
How will the rents be set?
At a minimum, the legal rent for affected tenants will be based on the rent paid four years ago, and that rent will be considered a stabilized rent, even if it is above $2,000. Tenant attorneys will be arguing that the rent should be set even lower, however, since this situation might fit within an exception to the “fouryear rule,” the rule that normally sets rents at the amount paid four years ago. The argument is that an exception should be made because the rent four years ago will in some cases clearly be the product of the illegal deregulation of the apartment. To get a rent adjustment, a tenant will have to file an overcharge complaint, bring a lawsuit, or join a lawsuit in progress.
Tenants will need to decide whether to file overcharge complaints with DHCR, or go to court. There is no substitute for speaking to a lawyer about this decision, since the costs, likely outcome, and benefits of different options are different in every case. Tenants who take no action at all risk having their rent permanently set at a higher amount than they could have gotten and never being able to recover some of their overcharges. They may also be forced to deal with the issue anyway, if the landlord ever tries to evict them as supposedly free-market tenants.
NEW YORK, Oct 23 (Reuters) - A Manhattan apartment complex cannot retroactively give up tax incentives in order to deregulate rent-stabilized units, a New York state appeals court ruled Tuesday.
The unanimous ruling by the Appellate Division, First Department, held that London Terrace Gardens, a complex that includes nearly 1,000 apartments, cannot repay the benefits it received under the city's J-51 tax incentive program.
The ruling builds upon the court's landmark 2009 judgment in Roberts v. Tishman Speyer Properties, which held that residential property owners who received J-51 benefits could not deregulate stabilized apartments.
The owner of London Terrace Gardens had argued that it would never have sought the tax incentives, which are meant to encourage apartment renovations, in 2003 if it had known that doing so would eventually prevent it from setting market rents. It offered to repay all of the benefits it had received from the city in exchange for nullifying its eligibility retroactively.
But the court ruled that the apartment complex had no available legal remedy under the law b ecause the J-51 program contains no provision for withdrawing from the program and repaying the tax breaks.
"The J-51 program is a tax benefit program -- there is no contract or agreement to rescind," wrote Justice Sheila Abdus-Salaam for the five-judge panel.
The panel, which also included Justices Peter Tom, Angela Mazzarelli, Karla Moskowitz and Dianne Renwick, affirmed a decision from Manhattan Supreme Court Justice Judith Gische.
Robert Goldstein, a lawyer for the complex, said his clients had not yet decided how to proceed.
City attorney Joshua Wolf said in a statement he was pleased the court affirmed that landlords cannot simply "undo" their participation in the J-51 program as a way of avoiding rent-stabilization requirements.
The case is London Terrace Gardens v. City of New York, Appellate Division, First Department, No. 7917-7918.
For London Terrace Gardens: Robert Goldstein, Richard Goldstein, Harry Frischer and Paul Gruber of Borah, Goldstein, Altschuler, Nahins & Goidel.
For the city and the Department of Housing Preservation and Development: Joshua Wolf, Paul Rephen and Vincent D'Orazio of the New York City Law Department.
For the state's Division of Housing and Community Renewal: Sudarsana Srinivasan and Michael Belohlavek of the New York attorney general's office.
In Roberts v. Tishman Speyer Props.,[FN1] the Court of Appeals held in 2009 that high-rent and high-income luxury deregulation under the Rent Stabilization Law (RSL) are not available where a rent-stabilized building is receiving J-51 tax benefits. In Roberts, the dissenters in the Court of Appeals predicted that "[i]t will take years of litigation over many novel questions to deal with the fallout from today's decision."[FN2] That prediction, as this article establishes, has proven true.
In 1992, Met Life applied for and began receiving property tax benefits under New York City's J-51 tax abatement program…which provided incentives for owners to rehabilitate and improve their buildings. One of the caveats of the J-51 program was that rent deregulation of residential units and buildings receiving J-51 abatements was prohibited. Met Life, and the successor owners of the Complex, have received approximately $24.5 million in real estate tax benefits since entering the program and are scheduled to remain in the program, and to continue to receive additional tax benefits, until 2017.
Following the Appellate Division and Court of Appeals rulings in Roberts, many owners were seized with the following idea: If obtaining luxury regulation while at the same time enjoying J-51 tax benefits was seen as double dipping, then owners should refund to the city all J-51 benefits received, and forfeit all future benefits, in return for the nunc pro tunc privilege of luxury deregulation. For most owners, this was an easy trade-off: In Roberts, for instance, the $24.5 million in tax benefits the landlord purportedly received no doubt paled in comparison to the value of deregulating apartments.
The concept of giving back J-51 benefits seemingly had much to recommend it. The city would receive tens of millions of dollars in benefits already taken, and would be relieved of the obligation of honoring future benefits. Owners would have their rent rolls restored, the high tax assessments on their buildings would remain intact, and those landlords would pay high property taxes to the city without any corresponding tax benefits.
In fact, in 2010, Senator Pedro Espada introduced legislation (S. 6811) which would have allowed owners to return J-51 benefits, and to waive future benefits, in exchange for the right to utilize luxury deregulation laws. The bill provided that the returned tax benefits would be used to create a program to freeze the out-of-pocket rents paid by low-income and moderate income rent regulated tenants who paid more than one-third of their income for rent and who earned less than $45,000 per year.
The bill never became law, and owners turned to the courts for relief. However, in London Terrace Gardens v. City of New York, decided by the Appellate Division, First Department, on Oct. 23, 2012, the Appellate Division unanimously ruled that owners could not return J-51 benefits to the city.
London Terrace Gardens is a housing complex located in Chelsea, consisting of approximately 1,000 rental units. In 2003, the New York City Department of Housing Preservation and Development (HPD) granted the owner J-51 benefits in the aggregate amount of $2.2 million, to begin on July 1, 2003. The owner believed, as almost everybody believed pre-Roberts, that the RSL provisions barring luxury deregulation in buildings receiving J-51 benefits applied only to buildings that became subject to the RSL by virtue of receiving such benefits, as opposed to buildings like those at London Terrace Gardens, which were rent-stabilized long before such benefits were obtained.
The owner of London Terrace Gardens had luxury deregulated many apartments before receiving J-51 benefits in 2003, and, consistent with the Division of Housing and Community Renewal's interpretation of the RSL, continued to deregulate apartments thereafter.
After the Court of Appeals ruled in Roberts, the owner wrote to HPD seeking to withdraw from the program ab initio and offering to return the benefits it had received to date. HPD denied the owner's request, stating that "'[t]he J-51 Program has no provision for voluntary withdrawal.'"
The owner then commenced two actions. The first was an Article 78 proceeding against the city and HPD whereby the owner sought to rescind its "agreement" with the city as to J-51 benefits. The action alleged rescission, declaratory judgment, agency misconduct, and violation of due process. The second action, which added DHCR as a defendant, sought similar relief.
The owner argued, in sum, that it would not have sought or accepted J-51 benefits had it known that such actions would re-regulate formerly deregulated apartments, and prevent deregulation in the future. The various defendants moved to dismiss the complaints. Both actions were assigned to New York County Supreme Court Justice Judith Gische, who has since been named to the Appellate Division.
Supreme Court then dismissed both the Article 78 petition and the plenary action.
There is no provision in the J-51 program for unilateral withdrawal from the program or for repaying the tax benefits in exchange for rescission from the program nunc pro tunc. On the contrary, the Rules of the City of New York provide that "rent regulation [requirements] shall not be terminated by the waiver or revocation of tax benefits. London Terrace asserts that it is not seeking a waiver of previously accepted benefits but instead, a finding that the benefits are deemed void ab initio. Still, in practical effect, under the guise of rescission, London Terrace is seeking a waiver, which is not permitted under the Rules of the City of New York" (internal citations omitted, material in brackets in original).
Furthermore, even though DHCR, and perhaps also HPD, were under the same mistaken interpretation of the Rent Stabilization Law as was London Terrace prior to the Court of Appeals decision in Roberts, that interpretation is entirely unrelated to HPD's confirmation of London Terrace's eligibility for the J-51 program. As indicated in the J-51 Certificates issued by HPD, the presence of decontrolled units was relevant to HPD in determining the amount of J-51 benefits to be provided. Thus, any mistake as to the law by HPD regarding whether units could be decontrolled while receiving J-51 benefits was immaterial to HPD's decision to accept London Terrace into the J-51 program (italics in original).
The foregoing quote reveals yet another irony in the post-Roberts world for owners. Prior to Roberts, HPD would diminish the amount of J-51 benefits in proportion to the number of apartments that had been luxury deregulated; HPD did this, obviously, while under the impression that J-51 benefits and luxury deregulation could coexist. Thus, owners (like the owner of London Terrace Gardens) who obtained J-51 benefits not only inadvertently destroyed their past and future efforts to deregulate apartments, but received diminished benefits based on the existence of luxury deregulated apartments which, it turns out, were never luxury deregulated in the first place.
Absent Court of Appeals intervention, London Terrace Gardens forecloses possibility that owners can regain the benefits of luxury deregulation by refunding benefits ab initio. One suspects that owners may be similarly unsuccessful when they approach HPD for additional J-51 benefits based on the fact that HPD's proportional diminution of benefits, based on the existence of so-called luxury deregulated apartments, was, in fact, in error.
Warren A. Estis is a founding partner at Rosenberg & Estis, and Jeffrey Turkel is a partner at the firm.
1. 62 A.D.3d 71, 874 N.Y.S.2d 97 (1st Dept. 2009), aff'd 13 N.Y3d 270, 890 N.Y.S.2d 388 (2009).
2. 13 N.Y.3d at 295.
3. 62 A.D.3d at 73-74, 75.