The new rent reality: Lawsuits, lobbyists and Advil

On the heels of monumental changes to New York’s rent laws, landlord groups are scrambling to protect their interests
By Georgia Kromrei and Eddie Small | August 01, 2019 10:00AM

July’s rent laws seminar at 1 Metrotech Center in Brooklyn (Credit: Twitter / Marcus & Millichap)

It was standing room only at 1 MetroTech Center in Brooklyn in mid-July.

More than 100 landlords and investors packed into a conference room that Marcus & Millichap scrambled to reserve after receiving a flood of registration requests.

“I hope you brought a bottle of Advil,” Belkin Burden Wenig & Goldman’s Daniel Altman told the crowd. “And we have social workers and counselors in the back.” It wasn’t long before someone from the crowd yelled, “We’ll need more than that!”

Altman, who co-led the presentation, instructed audience members to brace themselves for widespread changes in the wake of “the Rent Revenge Act of 2019.” His colleague Alexa Englander told attendees that there is “no safe harbor” for landlords under the new rules, which affect roughly 1 million stabilized apartments in the city.

But a highly anticipated counterattack from industry lobbyists is now in play.

The Rent Stabilization Association and Community Housing Improvement Program’s federal lawsuit challenges the new rent law based on alleged violations of ownership and due process rights. And the city of New York and the head of the state’s Department of Homes and Community Renewal are named as defendants.

RSA and CHIP, along with seven landlords run by three families, claim the changes to New York’s rent law violate the U.S. Constitution’s Fifth Amendment, which includes a clause that bars taking of private property without “just compensation,” and the Fourteenth Amendment’s due process clause.

The revisions to rules governing the conversion of rental buildings into condominiums — specifically changes to noneviction plans — also represent unlawful taking, the landlord groups argue.

“There’s a tremendous urge in the industry for anyone who has a lawyer and money to file lawsuits,” CHIP’s Jay Martin told The Real Deal before the lawsuit was filed last month. But preparations for a legal challenge have been underway behind the scenes for the past 18 months, the former strategic director of the state Senate’s Independent Democratic Conference added.

Long odds

Tenant advocates say the likelihood of a successful legal challenge is slim at best.

State Sen. Julia Salazar, a key backer of the rent bill, called RSA and CHIP’s lawsuit a “cynical attempt” by landlords to shirk their legal responsibility. She added that the recent legislation was passed to help tenants who struggle to afford rent while landlord profits continue to rise.

“It’s telling that the real estate lobby is choosing to spend their enormous resources on this lawsuit while they’re crying that their members can’t afford to maintain their buildings,” Salazar said.

None of the landlords named as plaintiffs in the suit, meanwhile, are particularly large. Constance Nugent-Miller only owns one six-unit rental building, at 682 St. Johns Place, Brooklyn, and the three companies controlled by the Mycack family only own three buildings — on East 5th Street in Manhattan and 34th Street and 35th Avenue in Queens, according to property records.

Katz Realty Group owns and manages more than 24 properties across the city, its website says. The lawsuit only refers to three, which are in Jackson Heights, Forest Hills and Bay Ridge, according to property records.

RSA President Joe Strasburg said all three landlords approached the group to be included in the lawsuit. “Everyone has a complaint. We evaluate,” he said. “But do they raise to a level of the taking, according to the attorneys?”

Strasburg said he wasn’t bothered by the fact that the Mycaks are simultaneously the defendants in an ongoing class-action J-51 lawsuit about violating existing rent regulations, and the plaintiffs in a lawsuit trying to overturn new rent regulations.

“Everyone’s going to get sued and get a story. Everyone has violations,” he said. “No one walks in who’s a purist, however anyone wants to define it.”

Richard Walsh, the Mycak family’s attorney in the J-51 lawsuit, echoed that point. “I don’t agree that it’s hypocritical,” he said. “I think it’s self-preservation.”

The lawsuit from RSA and CHIP cites numerous ways the new rent law has harmed the three landlords. It claims Nugent-Miller “has been forced to offer renewal leases to stabilized tenants at rental rates far below the market and has twice been denied the opportunity to occupy a first-floor unit in her own building in favor of a stabilized tenant.”

The Mycak family has also had to rent  its apartments below market rates and does not plan to repair or re-rent them once they become vacant, as it doesn’t make economic sense under the new law, the suit says.

Representatives for Katz did not respond to a request for comment, and representatives for Nugent-Miller could not be reached.

(Credit: Twitter / Marcus & Millichap)

Alternative tactics

Changes to the state’s rent law impose several restrictions on how landlords can raise rents on stabilized apartments. The signed bill eliminates vacancy decontrol and bonuses, makes rent increases through Major Capital Improvements and Individual Apartment Improvements temporary and paves the way for potential expansion of rent stabilization into other parts of the state.

As lawyers carefully went through each key point of the new law in Downtown Brooklyn, gasps or eruptions of disbelief were heard from the crowd.

Belkin Burden’s Altman said an organized legal challenge could be a long and drawn-out process. “A lawsuit is going to take one or two years,” he said. “Be patient and keep reading.”

But for now, there are still routes that landlords can take to juice rents, and many are exploring “creative” options even if RSA and CHIP’s lawsuit fails.

“A vacancy is now the only path to raise rents to the legal rent if a tenant has preferential rent,” Marcus & Millichap’s John Horowitz said. “So you’re going to see a return of buyouts.”

An even quicker workaround seems to be gaining popularity with some landlords.

“We have some clients getting ‘creative,’ signing leases at an earlier date, which might not hold up,” Belkin Burden’s Englander noted at the seminar. “And depending on the tenants, is a risk some might want to take.”

Blaine Schwadel, of Rosenberg & Estis, said he’s wary of that tactic.

“If it’s true that’s fine, but if it’s fraud — take your pick,” he said. “So we’re going to lie? No. If a tenant wants to file an overcharge complaint, they know exactly when they moved in. People are outsmarting themselves.”

Branding problems?

After the seminar concluded, landlords stood around in groups of three or four, some yelling Margaret Thatcher quotes and others shaking their fists at Charles Barron — the Assembly member who locked horns with RSA’s Strasburg during a public Assembly hearing on the rent laws.

Some landlords said they’re becoming frustrated by the industry’s messaging.

Odin Realty’s Thomas Laskaris, who claims to own 24 rental apartment units, offered a cheeky approach to rehabilitating real estate’s image.

“We need a rebranding. The name ‘landlord’… it just doesn’t work,” he said. “How about ‘sweat equity general?’”

Another developer, who left his native Ukraine for Rockland County and declined to give his name, was aghast at the changes. “Not even Karl Marx in his manifesto would have dreamed up such laws,” he said.

Sam Sarcona, senior project manager at Macklowe Properties, said the changes won’t necessarily hurt the landlords who were reaping the fattest profits under the previous rules. Instead, he said, small landlords will bear the brunt of the costs, and larger firms will come in and clean house.

“The big corporate guys have the financing to sweep out all the little guys, buy out everyone and put in luxury towers,” Sarcona said.

Additional research by Mary Diduch

Editor’s note: This story is the consolidation of three news articles that ran online in July 2019.