The Real Deal prompts city investigation of make-shift hotel units

TRD New York /
Feb.February 04, 2009 11:45 AM

One luxury condominium developer has found a way to keep the cash flowing even if units aren’t selling — furnish the apartments and rent them as hotel units.

Cardinal Investments New York has been renting unsold apartments in at least two of its luxury condo projects — M127 at 127 Madison Avenue in Murray Hill and 17 Orchard Street at Canal Street on the Lower East Side — as fully furnished, short- and extended-stay hotel suites, according to Trevor Stahelski, a partner at Cardinal.

“You’ve gotta pay the mortgage, you’ve gotta keep the lights on,” he said, “so we furnished the apartments and rented them.”

Stahelski admitted the arrangement isn’t necessarily legal under city zoning laws. Inquiries from The Real Deal have prompted an investigation of
the Cardinal properties by the mayor’s Office of Special Enforcement,
which handles illegal hotel usage, said Jason Post, a spokesperson for
the agency.

There has been a recent increase in luxury condominiums rented on a transient basis, Post said. In the past, he added, such cases were most commonly found with affordable housing units.

Now, dozens of apartments throughout the city, including Stahelski’s, are listed for rent on a nightly to monthly basis on the Web site Vacation Rentals by Owner, or VRBO.com.

“It’s a little bit of a gray area,” Stahelski said. But, rather than suffer through the process of obtaining a zoning variance that allows transient use in the building, Stahelski said Cardinal is renting them on a nightly basis while continuing to lease and sell the remaining units.

But it’s not really a gray area, according to one zoning and buildings code expert, who asked not to be named because his clients are developers. He analyzed the certificate of occupancies for the two properties and said it is illegal under city zoning at 127 Madison Avenue, at 31st Street, and that 17 Orchard Street doesn’t even have a certificate of occupancy, which means it shouldn’t be occupied at all.

“[Department of Buildings] could write several violations for it, but even if they did, the penalties and headaches would be a drop in the bucket compared to what they are netting on the illegal hotel rooms,” he said.

DOB referred questions on the issue to the mayor’s office.

Last year, Raziel Ofer, an Israeli businessman, was arrested for not paying $1.4 million in state sales tax on transactions from renting hundreds of luxury Manhattan apartments at a myriad of buildings including 244 West 64th Street and 307 West 79th Street, for short-term stays through his internet hotel business. Ofer pleaded guilty in July to grand larceny, according to the district attorney’s office.

In order to qualify as a violation, the enforcement office’s spokesperson Post said the developer would have to be caught in the act of renting an apartment as a hotel unit, rather than simply advertising rooms on the Internet. The first offense carries a fine of up to $800, and can exceed $2,000 per additional offense, he said.

Cardinal purchased 127 Madison Avenue, a commercial building, in May 2005 for $6.8 million, added six stories, and converted the space into eight condominiums. According to Cardinal Investments’ Web site, the $14.5 million project was estimated to take 20 months to sell out for over $19 million.

Since sales started in March 2007, the company has only sold two apartments, one for $1.6 million and the other for $1.65 million.

The M127 Web site advertises two-bedroom apartments starting at $385 per night. The Web site lists the building’s sprawling, three-bedroom penthouse duplex at $1,700 per night, plus a $150 cleaning fee upon check-out, $11.50 occupancy tax, $240.13 sales tax, and $1,000 damage deposit, bringing the grand total to $3,101.63 for one night, minus the deposit returned the following morning. Other services like light cleaning are available for additional charges.

Guests have use of the amenities at the Hotel Roger Williams next door under an agreement with the hotel, Cardinal’s Stahelski said.

At 17 Orchard Street, prices for nightly accommodation in a two-bedroom full-floor apartment range from $340 to $680 per night, depending on the season, according to the listing on VRBO.com. The company does not have a Web site for 17 Orchard Street.

The building was purchased in August 2007 for $6.1 million and no sales have been recorded, but Stahelski said contracts and long-term leases are out for all but two of the seven units. “I might even take one for myself,” he said.


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