Like many New Yorkers of a certain age, the five-building Southgate complex in Midtown East needed a serious facelift in 1994, roughly 70 years after being built. In order to fund renovations, the cooperative owner applied for and received $88,200 in J-51 tax benefits, which expired in 2005.
A decade later, those funds are at the center of a dispute over whether developer Aby Rosen’s RFR Holding, which bought unsold co-op shares at Southgate in 1996, can deregulate rent-controlled units in the complex.
Rent stabilization law concretely states that rent-stabilized units may be deregulated once J-51 benefits — tax incentives given to building owners for renovating multi-unit residential buildings — end. But rent control law is ambiguous and does not explicitly state whether landlords can deregulate rent-controlled apartments once the J-51 benefits expire.
According to RFR, which sought to deregulate a rent-controlled co-op at Southgate, the Division of Housing and Community Renewal erred in 2011 when it interpreted that legal gray area to mean that rent-controlled units must remain rent regulated.
RFR’s interest extends beyond the apartment in question, whose tenant moved out in 2013 after settling with the developer. Rosen’s firm owns shares in more than a dozen co-ops and condos on the Upper East Side, Upper West Side and the West Village, according to court documents. Though RFR’s legal battle may only impact a few dozen apartments, deregulation across multiple properties would free up a healthy revenue stream.
Citywide, any precedent favoring developers and landlords over J-51 rent controlled deregulation would be fairly muted. There are fewer than 30,000 rent-controlled units left in the city and only a fraction have rent exceeding $2,500 a month.
The apartment in question had been occupied since the 1950s by an elderly widow, Phyllis Berk, and her adult son, according to court documents, which redacted the exact location of the apartment. Southgate is comprised of five buildings at 400, 414, 424 and 434 East 52nd Street and 433 East 51st Street.
RFR purchased unsold shares at Southgate in 1996, according to court records, two years after the buildings received the J-51 tax benefits. J-51 benefits, enacted in 1956, are tax incentives given to building owners for renovating multi-unit residential buildings.
In 2008, three years after Southgate’s J-51 benefits expired, RFR attempted to decontrol the Berks’ apartment under luxury decontrol, which permits deregulation if the tenants’ income and rent exceed a specified threshold. At that time, the Berks’ income exceeded $175,000 and monthly rent was more than $2,000, the threshold at the time. (Today, income must exceed $200,000 and monthly rent must be more than $2,700 to decontrol.)
There was no dispute that the Berks’ income and rent met the luxury decontrol standards, and in 2010, the DHCR issued a deregulation order. But the Berks challenged the order, and in 2011 the DHCR reversed its decision on the grounds that RFR benefited from the building’s J-51 tax benefits. In that ruling, the DHCR said rent regulation continues until after the tenant vacates the apartment.
RFR turned to the courts to resolve the issue. A state Supreme Court judge ruled in favor of RFR in 2012, but an appellate court overturned the decision last year. In its latest brief, argued Nov. 18 before another appeals court, RFR argued that it “should not forever be barred from pursuing luxury deregulation” because there’s no language to resolve this specific scenario.
Real estate attorney Steve Wagner, who is not involved in the case, said for landlords and developers like RFR, the case represents a greater conversation about deregulation.
“Deregulating the units are important,” said Wagner. “They get to sell and make money.”
At one Southgate building, 433 East 52nd, a one-bedroom is asking $790,000 while a three-bedroom penthouse is listed for $9.495 million, according to StreetEasy. The average sales price at the building is $915,000.
Robert Jacobs, the attorney who filed an amicus brief on behalf of landlords, said immunity for wealthy tenants living in rent-controlled units runs contrary to luxury decontrol laws, which are designed “to protect moderate income people from the deleterious effects of the housing shortage.”
RFR did not respond to a request for comment. An upcoming court date has not yet been scheduled.