UPDATE, Oct. 30 2020, 2:30 p.m.: Four Brooklyn landlords have been hit with class action lawsuits accusing them of illegally inflating rents at four rental buildings dating back to 2015.
The suits, filed Thursday in Kings County Supreme Court, allege that the landlords separately used the same fraudulent scheme to undermine the 421a tax abatement program and illegally inflate rents at their respective buildings, which altogether contain about 370 rental units.
The landlords named in the suits are John Catsimatidis’ Red Apple Group for 670 Pacific Street; Muss Development for 180 Franklin Avenue; Spruce Capital Partners at 1209 Dekalb Avenue; and entities related to developer Chaim Miller at 3052 Brighton 1st Street.
At the heart of the lawsuits is the question of whether it’s legal to offer concessions on the initial rent for a unit in the 421a program. If the tenants prevail, the outcome of these cases would have widespread implications for developers using 421a and offering concessions to renters.
The alleged scheme the landlords are accused of employing was uncovered by an investigation conducted by Housing Rights Initiative, a watchdog group.
The scheme detailed in each of the four complaints involves the landlords offering concessions — often in the form of a number of months of free rent — to its first crop of tenants, effectively giving them a preferential rent. Meanwhile, the landlords recorded a higher initial rent with the state’s Division of Housing and Community Renewal as part of the 421-a program. That registered initial rent then became the baseline that subsequent increases are based on.
The tenants’ attorneys argue that the discrepancy between the actual rent the landlords collect in the first year and the initial rent registered with DHCR is illegal. If the cases are successful, tenants who lived in any of the four buildings since June 2015 could recoup hundreds if not thousands of dollars in rent.
“We’re pleased to be able to expose these owners for what they are: cheaters,” wrote Lucas Ferrara, a partner at Newman Ferrara LLP, in an email. The filing of the class-action suits was first reported by The City.
The landlords deny wrongdoing; attorney Sherwin Belkin, whose firm is representing Muss Development, noted there is legal precedent establishing that a temporary rent concession does not reduce legal rent.
But tenant attorney Steve Wagner, who is not involved in the cases, pointed to at least three rent overcharge cases, including two within the last two years, where renters in 421a buildings successfully won against landlords who charged a lower initial rent than they legally registered.
“The problem for the landlords here is they’re establishing a first rent,” and the law is very specific, he said. The section of the Rent Stabilization Code that deals with the establishment of initial rent for units under 421a states that the legal rent is “the initial adjusted monthly rent charged and paid.”
“[These class-action suits] may be publicizing it for the first time but there is appellate case law on this,” said Wagner, which means multiple judges have reviewed the issue and agreed.
The landlords are gearing up for a heated legal battle.
Martin Heistein, Belkin’s partner at Belkin Burden Golden is representing Muss Development, and he called the suit “frivolous” with “absolutely no merit.”
“We believe our clients have acted above-board and the facts will ultimately bear that out,” he said.
Matan Kurman of Spruce Capital Partners, which owns 1209 DeKalb Avenue, echoed the sentiment. “The allegations are unfounded and we intend on vigorously defending ourselves,” he wrote in an email.
Catsimatidis also called the allegations “unfounded” and said it was “disappointing” to see a law firm that represents Red Apple, “ambulance chasing.”
Ferrara admitted his firm did represent the billionaire developer, but said the engagement was “extremely limited in scope” and unrelated to Red Apple’s residential holdings.
“No one here has spoken to Mr. Catsimatidis or any member of his organization in about five years,” he said. “If that’s the best argument they’ve got, we wish them a lot of luck.”
Chaim Miller’s business partner, Sam Sprei, did not respond to requests for comment.
HRI has initiated class actions on behalf of tenants in rent overcharge cases against Kushner Companies and multiple other landlords since its founding in 2016.
In light of its findings, the watchdog group is calling for Gov. Andrew Cuomo to conduct a comprehensive audit of the 421a program to uncover similar instances of fraud, and for greater oversight from DHCR, according to a statement released Thursday.
“It is time for the New York State government to do their jobs and put our organization out of business,” said Aaron Carr, HRI’s founder and executive director.
Brian Butry, a spokesperson for DHCR, said the state agency has “zero tolerance for landlords who unlawfully overcharge tenants” and is “committed to protecting the rights of rent-regulated tenants by enforcing and administering the law as enacted by the Legislature and interpreted by the Courts.”
Cuomo’s office did not respond to requests for comment.
Though landlords using the 421a program must register rents with DHCR’s Office of Rent Administration, which also fields complaints from tenants, New York City’s Department of Housing Preservation and Development is responsible for reviewing whether a project is compliant with the program, and can suspend the tax abatement.
Jeremy House, a spokesperson for HPD, did not respond to TRD’s request for comment but he told The City the agency would have taken action “had these complaints been brought to HPD’s attention.”
Correction: An earlier version of this story incorrectly stated the appellate case law Steve Wagner described was decided in a higher court than the Kings County Supreme Court. The courts are in fact at the same level, so the decision is not binding. An earlier version of the story also incorrectly referred to Spruce Capital Partners as S3 Capital Partners.