Extell scores win in fight against state, holdout tenant

Holdout tenants literally shaped Gary Barnett’s plans for an L-shaped development on First Avenue in Yorkville. But the developer may soon have a bit more design flexibility.

A state appellate court has sided with his firm’s quest to evict a rent-regulated tenant at 1651 First Avenue. The tenant and other holdouts had caused Extell Development to design around their buildings. In November 2021, Extell filed plans for a 22-story building featuring 543 apartments and commercial space.

State officials repeatedly rejected Extell’s requests to deny its rent-regulated tenant a lease renewal so that it can demolish the building. But in a unanimous September ruling, appellate judges found that the state Division of Housing and Community Renewal’s decision “was an error of law and was arbitrary and capricious.”

The court reinforced the ruling on Tuesday, denying the agency’s motion to reargue its case or to advance to the state’s highest court.

Sherwin Belkin, a real estate attorney who is not involved in the case, called the decision a significant win for developers looking to demolish their rent-stabilized properties. Regulated tenants are entitled to lease renewals except when the landlord “intends in good faith to demolish the building” and receives approval from the city’s Department of Buildings.

The owners must then file an application with HCR to deny lease renewals to its tenants. The state’s housing regulator, however, has taken the position that owners must also demonstrate post-demolition plans for the site and financing to build.

“That is an expensive and very time-consuming process,” Belkin said, adding that he has at least five clients who will likely move forward with demolition plans, given Tuesday’s decision.

Though Housing and Community Renewal and the holdout tenant, Greg Marshall, can still ask the Court of Appeals to hear its case, but it is exceedingly rare for the high court to hear appeals of unanimous rulings.

In this case, Extell told state officials in 2019 that it had enough money to demolish a six-story building at 1651 First Avenue. The job would cost nearly $500,000, and the developer had a separate account with $1 million dedicated exclusively to the building’s demolition, according to court documents.

For a well-funded developer like Extell, such proof was a perfunctory step toward denying its rent-regulated tenant a lease renewal.

But the state wanted Extell to either show that the building posed a danger to its sole tenant, Marshall, or that it had approved plans for new construction on the site. The developer argued that the law only required proof that it had city approval for the demolition and could afford it.

Extell sued the state and Marshall in June 2021, seeking to annul HCR’s rejection of its demolition request. The complaint largely revolves around one word, “undertaking,” in state law.

The developer argued that the housing regulator misinterpreted the law when it deemed Extell had failed to provide proof that it could pay for its planned undertaking on the site. Extell claimed the demolition was the sole undertaking, while HCR said the replacement project should be included.

Extell first filed a demolition application in 2015 that revealed the site was part of an assemblage where it planned a 36-unit, mixed-use building costing about $95 million. In 2017, HCR denied the application, citing the lack of evidence that the developer could pay for the project.

Two years later, the developer filed another demolition application, but left out details about the proposed development, according to HCR. The agency said Extell would not answer simple questions about its plans.

The state Supreme Court agreed with HCR in its September 2021 decision but the Appellate Division reversed the ruling, finding that language referencing plans for post-demolition had intentionally been removed from state law in 2000.

An attorney for Marshall, Fred Seeman, rejected the idea that Tuesday’s decision would hamper his chances at the Court of Appeals. He pointed to the administrative and Supreme Court rulings in his client’s favor. Marshall, who has lived at 1651 First Avenue for more than two decades, is still there.

“There’s miles and miles to go before we sleep,” Seeman said.