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, which purchased rent-regulated complexes with an eye toward deregulating units and boosting rents to market rates in order to pay off their mortgages. Tishman Speyer is already having major financial problems at Stuyvesant Town/Peter Cooper Village, the sprawling complexes 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. Stuy 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 Stuy Town,” said Frank Ricci, director of government affairs for the Rent Stabilization Association. “It is very bad for all New York City real estate.”
Mr. Ricci pointed out that the ruling doesn’t just affect owners who recently bought buildings, noting that all landlords who make significant improvements to their buildings, like upgrading the plumbing or electrical system, may qualify for J-51 tax benefits.
It is unclear how many landlords might be affected. Alexander Schmidt, who represented the tenants in the case, estimated there are about 300 rent regulated buildings with J-51 tax benefits that have more than 100 units. He used that threshold in his search. However, others suggest there are over 8,000 buildings that could be affected.
However, Mr. Schmidt says it’s impossible to know how many of the units in those buildings have been deregulated.
“We feel terrific about the decision,” Mr. Schmidt said. “We think it is an important victory for our clients and renters all over the city.”
Mr. Ricci said the decision will cause an administrative nightmare because landlords will have to go back and regulate apartments. Moreover, he noted the decision will also hurt the city’s finances because landlords’ taxes are based in part on rent rolls.
Tishman Speyer can try to appeal the ruling, but that won’t happen automatically because the decision was unanimous.