Building Chaos

A huge chunk of the city’s rental-apartment industry is in chaos this weekend as owners and tenants grope with the Court of Appeals ruling that luxury rent increases at Stuyvesant Town were illegal.

“Chaos is the perfect word,” said Jeffrey Turkel, partner in Rosenberg & Estes, who had filed an amicus brief on behalf of the Rent Stabilization Association, an owners’ group.

As renters and owners alike burned up the phone lines with their lawyers, questions swirled concerning:

* What rents tenants would be charged on Nov. 1. Would landlords collect the higher market-rate rents and put some in escrow or charge a lower rent with some modification to come?

* Whether each tenant affected by the court ruling — perhaps as many as 10,000 — has to file their own rent refund application.

* How the State’s Division of Housing and Community Renewal would deal with the expected application deluge.

* If each rent-refund application, with its unique time period and refund amount, would be fought for years in court by landlords.

* How much City Hall stood to lose in tax collections, which are based, in part, on the profits of building owners.

As far as how much rent to collect, some lawyers are advising owners to collect the full amount and place possibly disputed amounts into escrow.

“The most conservative is to say maybe you collect the fair market rent and it’s subject to further determination,” said Joseph Strasburg, President of the RSA. “Whatever you are collecting you can’t spend.” No one wants to give up any rights, nor do owners want to be in a situation where they may be liable for treble damages for willful overcharge, advised Strasburg.

The state’s highest court ruled that the owners of Stuy Town and Peter Cooper Village illegally raised rents while collecting tax rebates, known as J-51 payments.

According to the Dept. of Finance, in the year ending June 30, the J-51 program provided 15,093 exemptions and 137,386 abatements to 723,811 apartments. But not all of those units will be affected.
Those affected will most likely live in Manhattan and parts of Brooklyn where luxury decontrol would have kicked in for apartments renting for more than $2,000 a month and for those tenants having incomes of over $175,000 for two years running.

Lawyers say each tenant’s situation will be different, and that each tenant may have to file an individual application with DHCR to receive possible rent breaks. They also agree that the woefully understaffed agency is not going to be equipped to handle hundreds, let alone thousands, of overcharge complaints.

Additionally, since it was this agency that gave the green light to owners 15 years ago, any decision it renders could be subject to further litigation.

The case itself affects just over 4,000 units at Stuy Town and Peter Cooper Village, where over $215 million is expected in refunds, but is now headed back to State Supreme Court for further clarification and litigation.

Issues yet to be decided, as directed by the court last week, include “retroactivity, class certification, the statute of limitations and other defenses that may be applicable to particular tenants.”

Currently, overcharge complaints can only be reviewed for four years from the date of the tenant’s DHCR application. Tenant lawyers may argue that the retroactivity should extend back for the entire 15 years since the state agency said buildings getting the tax abatement could also qualify for luxury deregulation.

Tenant lawyers could also request a class action on behalf of all similarly situated tenants. On the other side, owners’ lawyers will be fighting tooth and nail to limit the ruling and its effects.

“You can’t piggy back on someone else’s statute of limitations,” bristled Turkel.

Banks holding mortgages on the buildings will also have to figure out what to do. “They have lent based on a rent roll and now the loan may be out of proportion to the building’s value,” explained Turkel.

Already, the reserve fund set up by the owners of Stuy Town is running low and is expected to run out by January. The new ruling could force them to hand over the keys to lenders even sooner.

The general reduction in market values based on lower rents will also affect the city as it faces not only less tax revenue, and possible tax refunds, but a reduction in its bonding capacity which is based on full market values.

Both sides as well as the Court have said the state legislature could fix all the problems with new legislation. But there is nary an elected official that would dare now to come to the rescue of the real estate industry — even if it sends rental buildings into foreclosure and abandonment.

“If there are any members that are contemplating legislation, it’s probably too soon,” advised one legislative aide on condition of anonymity. “We are all still trying to figure out what this means.”



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