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Stuy-Town Win Could Have Ripple Effect

Steven Wishnia Nov 19, 2009

The New York State Court of Appeals handed tenants a major victory Oct. 22 when it ruled that the owners of Stuyvesant Town/Peter Cooper Village could not deregulate rents while taking tax breaks for renovating rent-stabilized apartments.

The court held 4-2 that buildings receiving tax benefits under the city’s J-51 program must remain rent-stabilized. It invalidated the state housing agency’s policy, which said that landlords could deregulate rents in those buildings as long as the tax breaks were not the only reason the apartments were rent-stabilized. Stuyvesant Town/Peter Cooper Village was rent-stabilized before 1992, when it started a 25-year arrangement to receive J-51 benefits.

Tishman-Speyer, which bought the East Side complex in 2006, may be liable for $200 million in rent overcharges. Rents on about 4,400 of the 11,200 apartments there have been deregulated, according to the Stuyvesant Town and Peter Cooper Village Tenants Association.

The decision means that “many tenants now have an opportunity to regain the rent-stabilized status that their landlords, assisted by the city and state governments, tried to take away,” housing attorney Seth A. Miller wrote in Tenant/Inquilino, the newspaper of the tenants rights group, Metropolitan Council on Housing. It applies to any building that receives J-51 benefits and to tenants who were not notified in their leases that their rents could go up when the benefits ended, he explains.

Citywide, the Citizens Housing and Planning Council estimated in March that more than 8,000 buildings with about 350,000 units were receiving J-51 exemptions or abatements.

No one knows how many of those have been deregulated, as the state Division of Housing and Community Renewal does not keep such records. Earlier this year, in a survey of buildings considered “predatory equity” — purchased by owners whose business model requires driving out rent stabilized tenants — the Association for Neighborhood and Housing Development (ANHD) identified 27,708 units citywide that receive J-51 benefits. But many of those are in neighborhoods where landlords have not been able to bring rents up to the $2,000 needed for deregulation, ANHD director Benjamin Dulchin notes.

Tishman-Speyer followed a similar business model. It paid a record $5.4 billion for the complex, expecting to profit by driving out longtime tenants and deregulating rents, but it has not been able to do that fast enough. The property’s value has declined to one-third of the purchase price, and Tishman-Speyer has begun to restructure its debt in a way that indicates it is likely to default very soon, Bloomberg News reported in early November.

“The borrowers’ equity is currently so far underwater, there’s not much point in extending the loan in the hopes that the market will recover quickly enough to service or repay the debt,” real-estate lawyer Kevin O’Shea told Bloomberg News. “You’d probably be just delaying the inevitable.”

Landlords and their sympathizers called the decision unfair. Owners such as Tishman-Speyer, they claim, relied on the overturned state policy, a 1996 declaration that it was legal in most cases to deregulate rents in buildings receiving J-51 benefits. Thus, they invested billions of dollars, believing they’d be able to make a profit from dramatically higher rents. They should not be penalized for relying on that doctrine, they now say. Miller has little patience with that argument. The city’s J-51 ordinance and the regulations of its Department of Housing Preservation and Development, he wrote, “said, in plain English, that every apartment in an assisted building must remain rent-regulated the whole time the building gets tax benefits.”

The state Division of Housing and Community Renewal, he contends, illegally misinterpreted the law under the distinctly pro-landlord administration of Governor George Pataki, and “under Bloomberg, HPD refused to enforce it.” Instead, HPD cut deals where it let landlords take buildings out of the Mitchell-Lama middle-income housing program, with the poorest tenants protected by costly federal subsidies. Some owners were allowed to return J-51 benefits retroactively.

“HPD could have given better protection, affecting more tenants, without spending a dime on subsidies, if it simply enforced the J-51 law as written and forced the landlord to treat the tenants as rent-stabilized when the developments were privatized,” Miller avers.

The decision leaves several questions open. How much will tenants be reimbursed for rent overcharges, and how can they collect that money? What will be the new rents for tenants whose apartments were illegally deregulated? How will the decision be applied to other buildings that decontrolled rents while taking J-51 benefits? These questions will likely be in the courts for years.

The case is not the first time Stuyvesant Town has figured in legal history. Built by the Met Life insurance company after World War II, the complex was initially restricted to whites only. When tenants organized and moved a black family into a vacant apartment, Met Life tried to evict more than 40 of the protesters. It failed, and in 1951, the city enacted a law banning racial discrimination in publicly assisted housing.