Plaintiffs in a lawsuit against the Blackstone Group are targeting a legal gray area that could permanently lock scores of New York City apartments into rent-regulation, if their claim holds up in court.
J-51, an incentive program that provides the city’s landlords with a tax exemption for making building-wide improvements, also places those units in rent-stabilization for the period the benefits are received. What happens to some of those units after the benefits expire has been called into question by the lawsuit, which could block a city-negotiated agreement.
The case against Blackstone, brought by Stuyvesant Town tenants, claims that some 6,200 units in the complex should stay in regulation forever. Now, local politicians backing the lawsuit are also seeking to block J-51 deregulation outside of Stuy Town — a move that some real estate lawyers see as a unique, and unwanted, possibility.
“There is no longer a path to deregulate every J-51 unit in [Blackstone’s] complex,” said Assembly member Harvey Epstein, who represents the Lower East Side, the East Village and Midtown East in Manhattan. “This is not just about the 6,200 units in Stuy Town, it’s about tens of thousands of units all over the city.”
Some 431,000 apartments across the five boroughs are now under the J-51 program, according to the city’s Department of Finance. A spokesperson for the Department of Housing Preservation and Development, which administers the tax exemption, said it’s unclear how many of those units would be exposed if the plaintiffs win. But some legal experts say the recent case against Blackstone could hit all apartments in the city receiving J-51 benefits.
Assessing the risk, however, is no easy task.
The lawsuit could “certainly impact other owners with J-51 tax abatements,” according to Sherwin Belkin, an attorney at Belkin Burden Goldman. He said he believes Blackstone’s deregulation will be upheld because of the agreement the landlord reached with the city and two prior settlement agreements that are unique to Stuy Town.
“Ultimately, I think it will come down to more generic J-51 and rent-stabilization issues that could affect many other apartments,” Belkin noted.
Systematic deregulation
Many rent-stabilized units in Stuy Town had previously been deregulated under more landlord-friendly rent laws.
Between 1994 and 2019, more than 6,000 apartments in the city — most of them in Manhattan — were converted to market-rate through a provision called luxury decontrol, according to the Rent Guidelines Board’s most recent report. The use of luxury decontrol was eliminated as part of the state’s rent law overhaul last year.
“We welcome the court’s involvement, but to be clear, no tenant subject to the J-51 program has seen an increase in rents above those legally allowed under rent stabilization,” a spokesperson for Blackstone told The Real Deal in a statement.
But a win for the plaintiffs could derail the investment firm’s deregulation plans and keep other units under the J-51 program from returning to the free market when the tax incentive concludes, according to one real estate attorney, who asked to remain anonymous.
“I don’t want to be alarmist, but landlords [with J-51 benefits] could be trapped in rent regulation in perpetuity,” the attorney said.
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How Stuy Town was won
The applicability of such a ruling outside of Stuy Town is unclear, since the massive apartment complex is governed by a unique regulatory agreement set between the de Blasio administration and Blackstone in 2015, as well as the two prior settlements.
In a landmark settlement against Stuy Town’s previous owner in 2009, the court found that Tishman Speyer could not deregulate apartments while receiving J-51 benefits — which led to a slew of rent overcharge challenges. Another settlement over the “Roberts v. Tishman” case in 2012, however, paved the way for the deregulation of more apartments in the complex.
But the agreement between Blackstone and the city can’t overrule a change to general law, according to Tim Collins, who represents the plaintiffs in the suit.
“The regulatory agreement was made in good faith,” Collins said. “But any claim that the … 2015 regulatory agreement trumps future legislation would mean that some agreement made in the past would immunize a building or group of tenants from general law going forward. And that makes no sense at all.”
Potential ripple effects
Collins said he’s unaware of the impact his case could have outside of Stuy Town, but did not rule out the possibility.
Last year’s rent reforms eradicated a 1993 law that allowed apartments to leave rent regulation after they passed a high-rent, high-income threshold, which Collins called an “aberration engineered by the real estate industry.”
The rent law that passed last summer was enacted largely at the behest of a coalition of groups representing lower-income tenants on limited budgets, enabled by a series of state election upsets in 2018 that unseated more moderate Democrats in favor of progressives and also ousted some Republican senators.
But the thought that a dramatic change in state law could potentially undo a regulatory agreement is one that does not sit well with many industry observers.
“Maybe Blackstone shouldn’t have signed the regulatory agreement unless the state legislature joined and promised to never make legislation that would take away [the ability to deregulate],” said Joshua Stein, a real estate finance attorney.
The investment firm sees it differently. “We are confident that the court will reaffirm the 2012 Roberts settlement, which explicitly stated that these J-51 units should no longer be subject to rent regulation as of June 2020,” a spokesperson for Blackstone said.
Some argue that the tenants of the sprawling East Side complex, once a haven for the middle class, are far more well-heeled than the average rent-regulated New York City renter. The median household income within Stuy Town is nearly $100,000, while the median income in neighboring Peter Cooper Village is $123,563, according to the latest American Community Survey estimates from the Census Bureau.
The attorney for the plaintiffs argued that point is irrelevant.
“The question is ‘what is a fair rent,’ regardless of whether you’re rich or poor,” Collins said. “The whole process of high-income deregulation only caused [tenants] to lose apartments so that even higher-income people could make money off the apartments.”
The Stuy Town units not covered by the 2015 agreement with the city have average rents of about $4,000 a month, and the average tenant income in those units is $262,000, based on self-reported data from tenants, according to Blackstone.
But Susan Steinberg, president of the Stuyvesant Town tenant association and a plaintiff in the lawsuit, claimed the income numbers are flawed. “That does not seem accurate whatsoever to me,” she argued. “If you came and walked the complex and started talking to people, you wouldn’t find anyone’s income that comes near that.”
Many apartments, according to Steinberg, are shared by several tenants — and recently, rents in some apartments have reached much loftier levels than are typically considered middle class.
“Four thousand dollars per month? Blackstone isn’t talking about the $6,000 or $9,000 or even $14,000-a-month rents,” she said.
Housing market headwinds
High-rent, high-income deregulation was used extensively in Stuy Town leading up to the financial crisis, as Tishman Speyer sought to repay highly-leveraged loans financed by public pension and sovereign wealth funds by moving market-rate tenants in and low-income tenants out.
The strategy failed, and Tishman defaulted. But rents at the complex remained high.
With the city’s multifamily industry now facing a different kind of crisis, Stuy Town has once again become a major focal point. The tenant lawsuit brought last week would add to an “already chilled business climate around housing,” Belkin argued.
But as to how many units in the J-51 program the outcome of this lawsuit could potentially affect, he said it’s beyond his ability to guess.
“If Roberts v. Tishman was [World War I], Stuy Town v. Blackstone could mark the beginning of WWII,” said Aaron Carr, executive director of Housing Rights Initiative, which has brought numerous J-51 overcharge cases against landlords.
An unfavorable decision for the real estate industry would likely be challenged and brought to the Court of Appeals, which is already deliberating a separate batch of J-51 cases, according to sources.
Alan Wiener, head of Wells Fargo’s multifamily lending arm, which provided the $2.7 billion mortgage for Blackstone’s acquisition of Stuy Town, said the uncertainty around the 2015 regulatory agreement should raise questions for Blackstone and other investors in the city’s rental housing market.
That comes in light of new progressive legislation and a statement from the de Blasio administration last week in support of the plaintiffs, he noted.
“From our point of view, as the lender with Fannie Mae, this is an extremely secure loan,” Wiener said. “But people may want to think twice about what signing an agreement with the city means.”
Write to Georgia Kromrei at gk@therealdeal.com