The Real Deal New York

NY isn’t telling tenants they may be protected from big rent hikes through J-51 program

Due to an error by state officials, rent limits on tens of thousands of NYC apartments were improperly removed. Now, 20 years later, the state is relying on landlords to fix that problem. What could go wrong?

July 06, 2016 12:10PM
By Cezary Podkul for ProPublica

j51 family

Lilian and Juan Piedra and their children were going to be evicted from their apartment until a lawyer discovered a J-51 tax break had existed for the property. As a result, they were able to stay. (Credit: Cezary Podkul/ProPublica)

In February of 2015, Lilian Piedra received a letter with devastating news: Her landlord was jacking up the rent for her four-bedroom apartment in Manhattan’s Washington Heights from $2,100 a month to $3,500.

The notice did not say she faced eviction, but Piedra immediately understood that’s what it meant. She and her husband were already struggling to raise three young children on her salary as a bank customer service representative and his as a parking garage manager.

“As soon as I received that letter I was crying for a whole week. Every single day I was crying, even at work,” she recalled.

The prospect of much higher rent touched off months of sleepless nights for the Piedra family as they desperately searched for somewhere else to live. The only apartment she found nearby was half the size for about the same price. Her brother offered to let the family move into his house on Long Island, but Piedra knew that cramming nine people into a three-bedroom house was way too crowded.

“I saw myself living in a shelter,” Piedra said. She ultimately refused to pay the higher rent and, within days, the landlord moved to evict her.

But just before a June 2015 hearing on the family’s eviction, their lawyer made a startling discovery. Piedra was among tens of thousands of people who had been improperly excluded from a program that protects tenants from New York City’s exploding housing costs. Raising her rent 67 percent was, in fact, illegal. So was the resulting eviction. She ended up staying in her place for $2,100 a month.

Others have not been nearly as fortunate.

The law that protected Piedra — rent stabilization — was tied to a tax break a previous owner had received for renovating the building. Under a program created by a state law, owners benefitting from the taxpayer subsidy are obligated to limit annual rent increases to modest levels set by the city.

But due to a series of actions — and inactions — by a pivotal state regulator, the benefits of this program vanished for many New York City tenants.

Over two decades, owners of an estimated 50,000 apartments pocketed the tax break while charging market rents. Tenants who couldn’t pay were forced out, deepening a shortage of affordable housing which Mayor Bill de Blasio acknowledges is a “crisis.”

ProPublica has been examining what New York City gets for an estimated $1.6 billion in tax breaks it has granted to property owners and developers.

We previously reported that landlords received tax benefits for adding apartments to Lower Manhattan and then avoided rent stabilization with help from regulators and then-Mayor Rudolph Giuliani. When we looked at a tax break aimed at spurring construction of new apartments citywide, we found that property owners did not even have to ask for lax enforcement; it was standard practice.

This story focuses on a tax break known as J-51 that was created to foster renovation of older apartment buildings. The public benefit of that program — rent-stabilized leases for tenants — was substantially undercut by a January 1996 opinion issued by the Division of Housing and Community Renewal, the state agency that administers rent laws.

Under pressure from the real estate lobby, the agency agreed that landlords could remove apartments from rent regulation in buildings receiving the tax benefit after rents reached “luxury” levels (then $2,000 a month), and certain other conditions were met.

The state’s highest court struck down that interpretation 13 years later in a scathing decision that should have been a boon to the tenants whose rents had shot up.

But in the six years that followed, state officials did nothing to turn the court ruling into reality. Tenant groups appealed to the Division at least twice, asking in 2011 and again in 2012 to “re-regulate unlawfully deregulated apartments” in the wake of the October 2009 court decision. The agency ignored those requests, and landlords across the city continued to raise rents and collect the tax benefit as if the judges had never ruled.

Finally, on Jan. 6, 2016, Gov. Andrew Cuomo announced that he would fix the problem the state had created 20 years ago.

“There will be zero tolerance for those who disregard the law and reap these benefits while denying tenants affordable housing they are obligated to provide,” Cuomo declared. Every New Yorker, he said, should have “a safe, decent and affordable place to call home.”

State officials were far less emphatic in a letter they sent building owners explaining how to comply with the court ruling.

The January notice told landlords they could continue charging rent at the current level but would have to register the apartments for rent stabilization.

This approach restricts future increases, but does nothing about past overcharges. Even more crucially, it does not roll rents back to what they should have been had the law been correctly applied. In a separate FAQ posted online by state officials, the regulators said only that owners “may” lower rents or return excess payments.

The state’s new rules are not the last word. Under New York law, tenants have a right to sue landlords for past overcharges. Some are now winning big money.

On Jan. 7, just a day after Cuomo’s announcement, a tenant on the Upper West Side prevailed in a long-running court dispute over having been deprived of rent stabilization despite the tax break. The tenant won a whopping $818,000 for overcharges, plus 9 percent interest, a five-fold reduction in rent and a right to keep renewing his lease at rent-stabilized rates for as long as he chooses to stay. The landlord, Mann Realty Associates, is appealing.

While few cases are likely to result in such large awards, knowing about the tax benefit is essential information for tenants who live in one of the affected apartments.

Cuomo depicted his January announcement as a “major initiative” to help renters, but the state has declined to directly notify the tenants of their rights. To help, ProPublica has created a guide to figure out whether a particular building received the tax break. Read the FAQ.

Piedra said she wished the state had told her about her status — it would have saved her months of fear and stress about losing her home. “They are telling the landlords but they are not sending that to the tenants. That’s not right,” she said when shown a copy of the state’s January notice to property owners.

Asked why the Cuomo Administration was not directly notifying tenants or insisting on rent reductions, a spokesman for the governor referred questions to the Division of Housing and Community Renewal.

The Division said in a written response to questions that it is confident its effort will “help tenants by spurring voluntary compliance by landlords.”

For their part, landlords are scratching their heads as they try to navigate between the relatively lenient requirements set by state regulators and the possibility of stiff penalties imposed by the courts.

“Owners just want to know what they are supposed to do and remain afraid of adverse consequences in the form of overcharge claims,” said Mitch Posilkin, general counsel for the Rent Stabilization Association, which represents many affected property owners.

Tenants’ lawyers say the regulators’ voluntary approach is flawed because it encourages landlords to keep charging higher rents and gamble that tenants lack the resources or knowledge to file overcharge complaints either in court or with DHCR, the state regulatory agency.

Some landlord lawyers are already giving their clients that advice: “Let someone else play the next chapter out in the courts or at DHCR before you go re-registering long-deregulated units. THIS is a choice that every landlord needs to make in conjunction with their counsel,” one attorney wrote in a February note to clients.

“It gives them a big escape route to avoid their wrongdoing,” said John Gorman, the lawyer who discovered the J-51 tax break on the Piedras’ building.

Born in the 1950s, the J-51 program reduces property tax bills in exchange for rehabilitating existing buildings and limiting rent increases on tenants. The idea was to preserve housing and keep it affordable over the duration of the benefits, which can last up to 34 years.

The cost of the program is substantial. The city forgoes $266 million a year in property taxes, making it one of New York City’s larger tax incentives for housing.

The rent limits tied to the tax break can make a significant difference to tenants in gentrifying neighborhoods, where average rents have risen more than 30 percent since 2000, according to a recent study. Last week, the city froze rents for rent-stabilized tenants with one-year leases for the second year in a row.

Worries about rising rents have a long history in New York City. Back in 1974, the legislature imposed rent stabilization on buildings with six or more units constructed before that year. Many were older structures that were already receiving J-51 benefits.

Nearly two decades later, in 1993, Albany lawmakers crafted a way for landlords to escape rent stabilization.

Under what became commonly known as “luxury decontrol,” landlords were free to charge market rents once prices crossed a certain threshold, then $2,000 per month (now $2,700). The decontrol took effect only after existing tenants moved out, unless they were affluent.

The law excluded J-51 buildings from luxury decontrol as long as owners received the tax break, no matter how high rents rose. Legislators wrote that decontrol “shall not” apply to apartments that “became or become” rent-stabilized “by virtue of” receiving the tax benefit.

In 1995, a prominent law firm representing building owners, Belkin Burden Wenig & Goldman, came up with a legal argument for turning this passage on its head.

The law firm noted that many buildings renovated under J-51 program had originally come under rent stabilization because of their age — that is, by being built before 1974, not “by virtue of” receiving the tax benefit. Under that reading of the law, owners would be free to raise rents through luxury decontrol at most J-51 buildings.

The firm asked lawyers at the Division of Housing and Community Renewal to agree, correspondence shows. Twice, they unequivocally refused, even as the law firm took their case to more senior officials.

But late in 1995, Belkin pressed again.

Sherwin Belkin — one of the industry’s go-to lawyers — wrote a lengthy letter in what he said was “yet a further attempt” to get the agency to change its mind “so that DHCR does not issue an advisory opinion that erroneously impacts upon a vast segment of the real estate industry.”

This time, an assistant commissioner named Darryl Seavey responded. Citing a definition of the words “by virtue of” from Webster’s College Dictionary, Seavey said in a Jan. 16, 1996 letter that Belkin’s interpretation was a “feasible alternative” to the view of the agency’s lawyers.

Seavey, who has since left the agency, did not respond to repeated requests for comment. Belkin said “there was nothing malevolent, underhanded or improper about seeking the agency’s advisory opinion. It’s what they are there for.”

Property owners say they had a right to rely on Seavey’s opinion when they deregulated apartments in the J-51 program. From the very beginning, however, there was reason to doubt that doing so was legal.

In his private letter to Belkin, Seavey noted that his opinion was not a formal agency order. In fact, the agency had already explicitly forbid luxury decontrol of J-51 apartments in a December 1995 policy manual. That instruction was widely ignored as owners chose to follow Seavey’s more lenient interpretation of the law.

Finally, in 2000, the state resolved the contradiction and moved to adopt Seavey’s opinion as the sole guidance on the issue. New York City’s housing agency protested, saying such a move would “permit the deregulation of units that were not intended to be deregulated.”

State officials ignored those objections and embraced Seavey’s letter. Despite this, New York City rules governing the J-51 program continued to forbid luxury deregulation.

“The whole industry gets a hold of the letter and runs with it, and this letter becomes the law,” said Alex Schmidt, a partner at law firm Wolf Haldenstein Adler Freeman & Herz.

In 2007, Schmidt’s firm helped residents of Stuyvesant Town and Peter Cooper Village — the biggest rental complex in the city — sue their landlord for taking apartments out of rent stabilization despite collecting J-51 tax breaks that had totaled nearly $25 million.

Amy Pasquale, then a single mom trying to finish grad school, had seen her rent surge 24 percent one year. Then known as Amy Roberts, she became the lead tenant in the case, known as Roberts vs. Tishman Speyer. She said she joined the suit because it was clear to her that lawmakers meant for rent regulation to accompany the tax break.

“You’re not going to get a tax break to provide market-rate rent for rich people. Like, you turn it around and it doesn’t make sense,” Pasquale said.

In October 2009, New York’s Court of Appeals took her side. The court overturned Seavey’s interpretation, agreeing with a lower court that it invited “absurd and irrational results.” A settlement lowered Stuyvesant Town rents by $105 million and awarded $69 million in refunds to 22,000 tenants.

A separate appellate case two years later made the ruling retroactive, opening the door for other tenants to pursue claims for past overcharges — and for regulators to fix their mistake.

“All of these lost units should have been returned to rent stabilization years ago,” said Ellen Davidson, a lawyer at The Legal Aid Society, which helps low-income tenants.

Being improperly removed from the rent stabilization rolls can have a real-life impact for tenants, as Lilian Piedra found out.

After her landlord demanded the 67 percent rent increase, Piedra visited a Division of Housing and Community Renewal office in Harlem on her lunch break to ask about her rights. An agency representative told her she was out of luck because her unit was no longer rent-stabilized, she said.

“Just negotiate with them,” Piedra recalled the staffer saying.

The same day, she called the building manager to try. But the company, Newcastle Realty Services, wasn’t interested and instead offered Piedra up to $18,000 to move out, she said.

Buyouts are a tactic commonly used to get low-income tenants out of gentrifying neighborhoods, renovate and rent out their apartments for more. Often it’s minority residents like the Piedras who get displaced in favor of more affluent tenants who can pay more, making the buyout a worthwhile proposition. For example, a similar, recently renovated apartment in the Piedras’ building is listed for rent at almost twice what they pay.

Figuring the buyout wouldn’t cover the cost of moving, the Piedras opted to stay. Newcastle sold the building for $14.4 million in March 2015, and the Piedras kept paying $2,100 to the new owner, Heritage Realty.

But Heritage wasn’t interested in the lower rent: It returned the family’s check and summoned them to housing court for an eviction hearing.

Shortly before a court date in June 2015, the Piedras went to a housing seminar at PALANTE Harlem, a tenant-rights group, in a last-ditch effort to find help. With all their paperwork, they went from one lawyer to another, only to be told they couldn’t fight the eviction without a rent-stabilized lease.

That was John Gorman’s reaction as well. “I said, ‘Gee, I’m sorry it looks like it was deregulated,'” Gorman recalled. But as the Piedras got up to leave, Gorman called them back: “I said, ‘Wait a second, let me just check on my phone to see if there may have been a J-51.'”

Flipping through past tax bills, Gorman noticed that in 2008, the year they moved in, the previous landlord had accepted a J-51 benefit worth $7,513 but didn’t offer them a rent-stabilized lease. Instead, records show their unit was deregulated using luxury decontrol.

“‘Don’t worry about it — you’ll win,'” Piedra recalled Gorman saying.

The following week, Gorman accompanied the Piedras to housing court, where he showed a copy of the tax bill to Heritage’s attorney, Doreen Fischman.

Fischman instantly dropped the case. She said Heritage did not know about the past tax benefit and did not mean to intentionally hide it from the Piedras.

Newcastle, the prior owner, also denied knowingly flouting the law. “If mistakes were made by prior ownership, ourselves or regulatory authorities,” a spokesman said, “then we are pleased that the situation faced by the tenant has been resolved.”

After the court date, Heritage offered the Piedras a rent-stabilized lease at the same $2,100 monthly rent they were paying.

Moreover, because the building’s previous owner didn’t notify them of J-51 — a common oversight among landlords — the Piedras are entitled to rent stabilization even though the tax break had expired.

It means that, as real estate continues to flip and Washington Heights gentrifies further, at least one family will now be protected — despite regulators’ failure to tell them about it.

“It’s like a lifesaver,” Piedra said.

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