Tenants, anyone?
Ever since a judge decided that developer Kent Swig could not force 23 market-rate rental tenants to vacate the Sheffield 57 condo conversion, the industry has been holding its collective breath to see what will happen next.
Developers are busy speculating what the final outcome of the case will be and whether other lawsuits by tenants in rental buildings pending conversion will follow.
In the mid-March decision, housing court Judge David Cohen ruled that even though the tenants paid market-rate rents and were not covered by rent-stabilization laws, they were protected against eviction by the state’s 1982 Martin Act, which governs condominium conversions. If the ruling is upheld, developers will not be able to evict market-rate tenants while a conversion is in progress, even if their leases are up and have not been renewed.
The inability to evict would have major financial implications for developers. Some developers are predicting price declines in investment rental properties and an increase in conversion costs on future projects. The changes could also influence how developers ask their tenants to leave — more kindly and with many more personal touches and financial inducements, said some experts.
Judge Cohen ruled that the tenants with no leases who were paying market rents have the right to keep their apartments and eventually to get new leases. The decision has angered Swig and baffled experts, who said the judge basically ruled on a technicality, since the law does not define the two issues in question.
“This decision created law,” said Swig, president of Swig Equities. “It is way overreaching, and I am pretty confident it will be overturned,” he said. Swig is also an owner and co-chairman of Terra Holdings LLC, a company that owns several real estate firms including Brown Harris Stevens and Halstead Property.
Swig bought the building in 2005, with partners who included Yair Levy, in what was at the time the most expensive U.S. residential property purchase ever at $545 million. Apartments in the conversion went on sale in October 2006.
Swig has not decided whether he will appeal the decision because, he said, the number of tenant holdouts represents a small fraction of the nearly 600 units in the 50-story building, and it may not be worth the cost. But he expressed surprise that more developers weren’t taking an interest in the case and said that if he fought it, winning would benefit the industry.
Steve Spinola, president of the Real Estate Board of New York, said the decision was unprecedented — and unlikely to stick. “I think long-term, no, this is a housing court decision that doesn’t make any sense at all,” he said.
The ruling is interpreted as if the tenants were asked to leave after the condo’s red herring plan was filed and approved, even though they actually didn’t have leases when the condo plan was submitted. According to the 1982 Martin Act, a rent-controlled, non-market-rate tenant cannot be evicted after a condo plan has been approved. Swig said the tenant leases in question had expired prior to the plan’s filing and that the interim — from the time they filed a lawsuit against the developer until the condo’s acceptance for filing at the attorney general’s office — should be taken into account in the decision. If it stands, the decision could have broad implications, because tenants have never been allowed to hold market-rate apartments without leases, he said.
Another Swig project on the Upper West Side hit a snag recently. Last month, the Department of Buildings issued an immediate stop-work order, halting Swig’s plans to add a nine-story condo on top of 201 West 92nd Street and 200 West 93rd Street, according to New York Magazine. Concerned about living below a construction project, tenants of the two adjoining rental buildings were reportedly thrilled with the decision.
Developers often figure in the cost of evicting tenants before they buy a building, said Trevor Stahelski, a partner in Cardinal Investments, which specializes in small- and medium-size building conversions in the city. Although it is impossible to tell how many renters will leave and how many want to stay, often that risk is calculated into the price a developer is willing to pay for the property. So if the perceived risk of conversions is now greater, the price of rental properties could fall, said Stahelski.
Perhaps the other building affected most by the decision is the Manhattan House, a Richard Kalikow conversion on East 66th Street. The 583-unit building, which Kalikow purchased with partner Jeremiah O’Connor in 2005, has already experienced a number of setbacks, including a possible landmarking and claims that the new owners are harassing tenants out the door. The owners paid a whopping $1.07 million per apartment, but they are unlikely to make back their money quickly. The project is going condo only a few units at a time, since most of the units are still occupied by renters, a process that may not be helped by the recent Sheffield decision.
“I was shocked Richard Kalikow did not call me every 10 minutes,” Swig said.
Other developers say it means there’s a need to apply a more personal and softer approach when it come to dealing with tenants they are asking to leave. Stahelski of Cardinal Investments was relieved that the case came up after he had completed the conversions of three of his properties.
In one building, he had 120 tenants who still had leases when he bought the building. He notified each tenant personally, knocking on their doors, or greeting them in the lobby when they walked through. He offered to pay for moving expenses and sweetened the deal for good tenants, sometimes paying broker fees. He also offered to place many in another rental building he owned.
He said the carrot approach worked: After he converted his 20 condo units at 245 West 115th Street in Harlem, the building was 100 percent sold in six weeks.