NY Pushes Peak Capital Advisors to Brink in Sub-Rehab Fiasco

While Mayor Zohran Mamdani targets landlords who don’t fix aging buildings, Gov. Kathy Hochul and Attorney General Letitia James are going after those who do.

Their goal is not merely to stop the loss of rent-stabilized apartments, but to reverse it. If they succeed, it could wipe out landlords’ investments in hundreds of buildings — and give their high-income tenants cheap rents for the rest of their lives.

The attorney general and Hochul’s housing commissioner, RuthAnne Visnauskas, are trying to make an example of Peak Capital Advisors, which from 2020 through 2023 gut-renovated 31 century-old buildings, removed them from rent stabilization and rented them out at market rates.

Real estate firms had been doing that for decades with the state’s blessing, but Visnauskas’ Division of Housing and Community Renewal came to believe they were abusing the process laid out by the agency in a 1995 bulletin.

If the state succeeds, Peak’s investment of $150 million would be eviscerated and the lenders on those buildings would lose most of the $95 million they put in. Peak itself has a small stake in the portfolio; 101 outside investors contributed nearly all of the equity.

The government-sponsored enterprise Freddie Mac financed eight of the properties, while Santander Bank provided mortgages to six, Webster Bank to five and Wells Fargo to four. Patriot Bank and Blackstone (Rialto) each financed two of the renovations. Amalgamated Bank, Chase Bank, Derby Copeland and Silverhill Capital funded the other three.

Policy reversal

Peak’s blueprint was the Division of Homes and Community Renewal’s Operational Bulletin 95-2, which in 1995 clarified the murky criteria for allowing deregulation of deteriorated, rent-stabilized buildings that were fixed up. (A 1992 Appellate Division ruling led to its issuance.) The point was to encourage substantial rehabilitation by making it possible to recoup the investments through higher rents without the prospect of a legal battle over each project.

Disaster struck last fall when DHCR disapproved Peak’s 31 sub-rehabs. The agency ruled that the buildings had not been “substandard or seriously deteriorated” as required for removal from rent stabilization.

If the ruling holds up, about 11,000 buildings deregulated under OB 95-2 would be at risk of having their old rent-stabilized rents reinstated. High-income tenants who have been willingly paying free-market rents in these fully renovated properties could get retroactive rent cuts and treble damages — not exactly the kind of affordability action that Hochul has been touting in her re-election campaign.

Peak claims DHCR retroactively applied a new standard. The agency counters that the standard clarified by the 1995 bulletin is simply being enforced. But lawyers who work on sub-rehabs say the agency’s change was unmistakable.

“DHCR started disapproving sub rehab applications for reasons they never had before,” said attorney Vladimir Favilukis, who is not involved in the Peak lawsuits.

For instance, the agency began treating six-figure buyouts for tenants who agree to vacate — which were common before sub-rehabs — as evidence that the buildings were in good condition. The agency’s logic: Why would a tenant demand $100,000, $500,000 or $1 million to leave a decrepit building?

Reality check: A low buyout figure, such as $10,000, doesn’t mean the tenant took it because the building was falling apart. It means the tenant failed to hire a lawyer to negotiate and was played for a sucker. A high-priced buyout means the rehab project will be lucrative, so the owner is willing to pay more.

Essentially, the state is rewarding dirt-cheap buyouts and punishing owners who forked over substantial sums.

“I’m still scratching my head about that one,” Favilukis said.

Dueling lawsuits

Peak Capital, founded and run by David Gomez and Alex Rabin, is fighting back. It formed an organization called Balanced Housing Solutions which filed a federal lawsuit in November.

“These guys did a great job of fixing up these properties, which are largely occupied by young professionals who are paying rents that they can afford,” said their lawyer, Jim Walden.

The initial filing mentioned the new group but not Peak. Then, six days later the attorney general and DHCR sued Peak in state court and issued a press release. It was clear that the two cases were about the same 31 buildings, and Peak gave up on the idea of keeping its name out of the press.

The firm recently brought in spokesperson Rich Azzopardi, best known as former Gov. Andrew Cuomo’s longtime attack dog, on the heels of retaining the high-profile Walden (a mayoral candidate in 2025) and veteran campaign consultant Hank Sheinkopf. The hires reflect the high stakes for Peak Capital Advisors and other sub-rehab investors.

“DHCR’s press offensive with [the attorney general] has effectively shut down PCA, leaving it with 31 stranded assets, virtually no income, investors who are defecting, lenders threatening to call in loans, and necessitating the termination of staff members,” Peak’s lawsuit claims.

The gut-renovated buildings are, on average, 105 years old. Peak says all were at least 80 percent vacant before being renovated. The firm replaced at least three-quarters of the buildings’ systems, a requirement for sub-rehab deregulation.

The legal battle hinges on the pre-renovation condition of the buildings and the 1995 bulletin, which says:

“Where the rehabilitation was commenced in a building that was at least 80 percent vacant of residential tenants, there shall be a presumption that the building was substandard or seriously deteriorated at that time.”

“What is the purpose of the presumption if you can’t rely on it?” asked Favilukis, a partner at Kucker Marino Winiarsky & Bittens.

Because Peak met the systems-replacement and vacancy thresholds, the state has the burden of proving the buildings were not substandard. To that end, its lawsuit says an environmental consultant who inspected the buildings before renovation confirmed they were in “fair condition at the time of purchase and had decades of estimated remaining useful life.”

Here is where things get tricky. Buildings with drafty windows, sloping stairs, 120-volt outlets and a boiler that breaks down on the coldest day of the year can be said to be in fair condition and habitable for years to come. But they are clearly “substandard.”

Some tenants would be willing to live in such buildings in exchange for low, stabilized rents. But if the state denies sub-rehabs based on mere habitability, privately funded rehabilitation will not be viable. Denials that render the 1995 guidance moot would bring back the ambiguity that it aimed to cure, discouraging legal sub-rehabs.

The case for undoing past sub-rehabs makes even less sense because there is no policy rationale for discounting high-income tenants’ rents in perpetuity at the cost of bankrupting their owners. Tenants would also get a fat check for past overcharges.

“They want Peak to compensate the new tenants at three times the difference between what they’d be paying if the rents were still stabilized,” said Adam Lehodey, who wrote about the saga in the Manhattan Institute’s City Journal.

He found two other completed sub-rehabs that the state then denied. The Real Deal wrote about one, 117 North Fourth Street, in August.

Given the pending litigation, the Hochul administration was reluctant to discuss the matter. “DHCR strongly disputes the claims in [Peak’s] lawsuit and will respond as appropriate in the ongoing litigation,” said a spokesperson for the agency.

One building’s story

The state’s lawsuit accuses Peak of duping its lenders and buyers of three of the buildings into believing the deregulations were legitimate. But Peak argues that the lenders and buyers were victimized by DHCR’s ruling the sub-rehabs illegitimate. Presumably, the 10 experienced lenders did their due diligence before providing the 31 mortgages.

I did some due diligence of my own, somewhat randomly picking the oldest building of the bunch, 154 Atlantic Avenue in Brooklyn.

Built in 1852, it is a handsome, four-story brick building in the Cobble Hill Historic District. In 1969, the year before that district was designated, owner Ann Yagoobian, who lived two blocks away on Amity Street, took out a $12,340 mortgage on the property.

She put it in a family trust in 1996, and in 2015, trustees Larry and Jerilynn Yagoobian, a married couple who had moved to Arkansas, sold it to a Maryland-based LLC for $2.9 million. The new owner filed for a series of building permits in 2021 but never did the work. In 2022, Peak bought the property for $3.48 million, with Peak co-founder Alex Rabin signing the deed.

Derby Copeland Capital, run by Jesse Hutcher and headquartered at 41 Madison Avenue, provided mortgages of $2.6 million and $750,000. Hutcher transferred the larger loan to a Churchill entity, based in Charlotte, in 2024.

When Peak learned that the state was investigating its deregulation of the 31 buildings, it submitted an affidavit from an architect stating that all of the systems in “many” of the buildings were in “substandard shape,” according to the attorney general’s lawsuit.

But when Peak bought 154 Atlantic Avenue, the boiler and hot water heater were only three or four years old, according to a source familiar with the work. Despite both being relatively new, Peak replaced them with heat pumps, helping it to exceed the 75 percent systems-replacement minimum.

Does that mean Peak gamed the system? I would say no: It met the terms demanded by the state’s own guidance in order to make the entire rehabilitation of the building financially viable. Pre-approval wasn’t even required.

“The operational bulletin is pretty clear,” Favilukis said. “You want to change it? Put it in writing.”

The state has not done that. Yet its revamped interpretation of the bulletin has cast a pall over the sub-rehab market.

Projects continue to happen, but only if they are cleared in advance — and many are not. Only 53 percent of sub-rehab filings over a seven-year period ending in August 2024 were approved.

“Unfortunately, the scales are weighed so heavily against landlords, it doesn’t seem to matter,” Favilukis said. “The principles used to deny an application are seemingly not rational.”