The Real Deal New York

Inside Kushner Companies’ murky relationship with rent stabilization

The company was required to register units as part of a 421a tax benefit -- it didn't
By Ben St. Clair | July 24, 2017 02:42PM

Jared Kushner and 50 North 1st Street in Williamsburg (Credit: Getty Images and JDS Development)

Jared Kushner’s habit of not properly filling out paperwork began years before his tenure at the White House.

In exchange for receiving a lucrative tax break on a rental building in Williamsburg, Kushner’s real estate firm was legally required to register the apartments as rent stabilized with a state agency. It did the first year. But the next year, it registered just five apartments. Then it failed to register any of the units.

That caught the attention of the state’s Homes and Community Renewal agency, which sent a warning letter to Kushner Companies last month. You haven’t complied with the legal requirements of the 421a tax exemption, it said, and you must register all rent-stabilized apartments at 50 North 1st Street.

The 421a program, which was recently reborn as “Affordable New York,” is supposed to incentivize residential construction by dramatically reducing a building’s property taxes. In exchange for receiving the tax break, owners are required to register all units as rent stabilized. But landlords across New York City have failed to register thousands of apartments in 421a buildings, creating a potential for abuse and illegal rent increases for tenants who may be unaware of the protections offered by stabilization laws.

Kushner‘s 50 North 1st Street is one of those buildings.

The firm bought the 46-unit Williamsburg property in 2013 from Largo Investments and Kevin Maloney’s Property Markets Group for $34 million. According to an analysis of public records by The Real Deal, Kushner registered all 46 units as rent-stabilized in 2014, as required by law. But in 2015, the firm registered just five units. As with many other properties across its vast New York City rental portfolio, Kushner did not report that any of the apartments were stabilized in 2016, according to tax records last month from the city’s Department of Finance, which derives its rent-stabilization count from what owners report to the HCR.

The 25-year tax break exempted Kushner from $1.2 million in property taxes in just the past two years.

Kushner, which Jared resigned from in January, denies that it hasn’t complied with the legal requirements of the 421a program at 50 North 1st Street. Any oversights, it says, were purely procedural.

“As is common with a change of ownership, there is often administrative clean-up and reconciliation that must occur,” Emily Wolf, Kushner’s general counsel, said in a statement. “However, paperwork aside, all 46 apartments have been and will continue to be regulated by the rent stabilization and 421-a guidelines.”

But the response leaves questions unanswered. Kushner claims that last year, it simply made a mistake when it filed the required paperwork with HCR six to seven months late. But the year prior, the company registered just five of the building’s apartments – and that was in 2015, more than a year after it bought the building.

When pressed, Kushner declined further comment and insisted the building was in compliance. The company said that filings this year will show the units’ correct status, but wouldn’t share any documents or figures with TRD, noting the records are not currently public information. This year’s filings will become public on tax records in mid 2018.

TRD dug further into Kushner’s history with rent-stabilization and obtained two rental histories from tenants at 50 North 1st Street. Rent histories list, among other details, the regulation status and legal rents of the apartment in question. One of the apartments shows no registration in 2015 and another unit reported no registration in 2015 or 2016. Since TRD contacted Kushner for this story, and less than a month after HCR sent the firm its warning letter, the former apartment was retroactively registered for 2016 with a filing date earlier this month.

It should be noted that both tenants have stabilized leases, which suggests Kushner has treated the apartments as stabilized even if the company did not properly register the units. TRD did not find any evidence that company has collected rents above the legal limit.

Kushner — whose former CEO Jared has been dogged for omitting assets on financial disclosure forms and for leaving foreign contacts off national security clearance forms — acquired a big chunk of its New York rental portfolio in 2013 when it went on a $262 million buying spree. Its acquisitions have mostly been in the East Village, but it’s also picked up buildings in other parts of Manhattan, as well as Brooklyn and Queens.

Kushner tenants in the East Village have alleged since as early as 2014 that the company, through its property management arm Westminster Management, has tried to push them out of their rent-stabilized and market-rate apartments, according to tenant organizer Brandon Kielbasa, organizing director of Cooper Square Committee. And a May investigation by the New York Times and ProPublica found that a company subsidiary — JK2 Westminster LLC — went to great lengths to extract money from largely poor tenants in Maryland, filing hundreds of lawsuits, many on questionable grounds.

The Kushner rental portfolio in New York City now includes over 1,300 units across 57 properties. Recent tax records show that Kushner reported owning 339 stabilized units in 2016, down from 601 reported across the portfolio in 2015.

Since 2012, the company has dropped a total of 253 apartments from rent stabilization, according to a TRD analysis of the tax records. The company contests this total, arguing that a majority of the losses reflect late filings from last year that caused many recent records to show zero registered units. (If the company’s claims are correct, the actual number of dropped stabilized apartments would be around 50 units.)

Rent-stabilization laws limit rent increases and offer protections to tenants living in over 1 million stabilized apartments citywide.

It’s not clear why the figures in Kushner-owned buildings declined, but experts told TRD that the state and city’s record keeping and tracking systems are less than stellar and could account for some of the discrepancies.

Each year, owners register stabilized apartments with the state’s HCR between April 1 and July 31, and the numbers reflect the building’s stabilized unit count on April 1.

The 421a tax exemption process involves multiple steps and filing requirements with HCR, as well as the city’s DOF and Department of Housing Preservation and Development (HPD). Paul Korngold, of the law firm Tuchnan Korngold, Weiss, Liebman & Gelles, said HPD is partially to blame for delays in issuing the necessary paperwork. However, “any delays at HPD should not have a bearing on the requirements to register the rents with the HCR,” he said.

When it comes to noncompliance in 421a buildings, owners are sometimes unfairly blamed, according to Korngold. “Various agencies are investigating some owners for alleged rent overcharges” even though “most owners obey the law,” he said. As a result, noncompliant owners give the rest a bad reputation, Korngold said, but added that HCR has been effective in addressing overcharge complaints from tenants.

HCR’s website explains that the agency “may impose a penalty of up to $250 upon owners for each knowing violation of the Rent Regulations,” a paltry sum for many New York City landlords, who can generate thousands of dollars from each rent overcharge. But failure to comply with 421a registration can lead to more significant penalties, according to a source familiar with the compliance process. If caught, a rule-breaker may have to pay back taxes for the years it was not in compliance. Generally speaking, the city tries to work with owners who have failed to register units and ultimately reduce penalties, the source said.

Following a series of reports by ProPublica that called out landlords who had improperly boosted rents in 421a building, state and city lawmakers have given the issue increased attention. In December, Mayor Bill de Blasio announced that the city was sending noncompliance letters to landlords owning more than 37,000 apartments regulated in 421a buildings, threatening to suspend their tax benefits.

The 421a program, which cost the city an estimated $1.4 billion in forgone tax revenue in FY 2017, has been the subject of state lobbying efforts by the real estate industry for decades. Through what’s known as the “LLC loophole,” developers can donate through the limited liability companies that legally own each of their buildings and obscure their role in the process.

A joint investigation by TRD and ProPublica found that 421a developers donated $21 million to state candidates and committees since 2000, roughly a quarter of all donations from the industry during this time. Gov. Andrew Cuomo received the most donations — $4.2 million over the course of his runs for governor and attorney general.

Will Parker contributed reporting.