For rent law cheaters, the ultimate punishment: Endless stabilization

Landlord calls itself victim of contractors, but AG finds abuse was obvious

Attorney General Letitia James (Illustration by Kevin Rebong for The Real Deal)
Attorney General Letitia James (Illustration by Kevin Rebong for The Real Deal)

A landlord busted in a scheme to yank hundreds of apartments out of rent stabilization claims it was really a victim of it.

Attorney General Letitia James didn’t buy the excuse, though, and said Wednesday that she has extracted a $4 million settlement from the building owners — 29 limited liability companies tied to Manhattan-based Sentinel Real Estate Corporation.

The facts of the case didn’t help Sentinel’s cause.

The LLCs had hired management firms that doctored up the cost of renovations just high enough to start charging market-rate rents, according to James’ office. The property managers accepted kickbacks from the contractors in exchange for hiring them.

Sentinel was not named in the attorney general’s case and its LLCs insist they had no knowledge of the scam.

A spokesperson for the owners told Crain’s they were “victims of this kickback scheme,” adding that once James raised the allegations, the landlords did an internal review and “promptly severed ties” with the management companies.

But privy to the kickbacks or not, the landlords benefited from it, James’ investigation found.

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Legal documents show that for over a decade before the rent law was changed in 2019, Newcastle Realty Services and Highcastle Management, two property managers hired by the LLCs, faked or inflated the cost of repairs on individual apartments.

Under the old law, the cost of expensive improvements could be passed on to tenants through rent increases. And if a unit’s rent surpassed a certain threshold, the apartment could be taken out of stabilization.

Gaming the law was fairly simple and many landlords did it legally for years, but in this case the owners got caught in part because they reported exactly the expenses necessary to bring each unit out of rent control. Some apartments received identical improvements, but the costs claimed varied by tens of thousands of dollars, according to James.

On top of that, the property managers pocketed over $1 million in kickbacks from the contractors — and buried the payments in bills for the work.

Deregulating a unit can mean thousands of dollars more rent each month for landlords. But the owners in the settlement now face a punishment worthy of Greek myth. As part of the deal, they must reset rents to legal rates, refund tenants the difference, and once again offer stabilized leases.

The cheaper rents figure to be in place for a while. The 2019 rent law ended so-called luxury decontrol, so units can no longer exit regulation by virtue of their rents exceeding a certain threshold.