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| New York City Commercial Real Estate News |
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APPEALING J-51 RULING
By LOIS WEISS
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Thursday, March 19, 2009 -
The Real Estate Board of New York has retained Stephen Meister, founding partner of Meister Seelig & Fein, to file an amicus brief seeking permission to appeal the recent unanimous decision by the State’s Appellate Division, First Department, concerning the impact of J-51 tax abatement benefits on the luxury decontrol under Rent Stabilization Laws of apartments at Stuyvesant Town and Peter Cooper Village.
The decision, which calls for all the Stuyvesant Town and Peter Cooper Village apartments that were removed from rent stabilization to return to rent stabilized status, shocked the real estate community. Absent the reversal of the decision by the Court of Appeals, about 4,000 tenants of those formerly rent stabilized apartments will be owed millions of dollars in refundable rent payments from project owner Tishman Speyer. The decision could open the floodgates to similar lawsuits and administrative overcharge proceedings brought by tenants of thousands of decontrolled units throughout the city.
The case for maintaining rent stabilization of the decontrolled Stuyvesant apartments was originally brought by a few fair market tenants as a putative class action, and then dismissed by New York County Supreme Court Justice Robert Lowe in 2007. The tenants contended that Tishman Speyer should not be able to remove apartments from rent stabilization protections when the owner was receiving benefits under the J-51 program, which provides owners with tax abatements for health and safety related building-wide capital improvements.
Meister explained that by giving owners of pre-existing rent stabilized buildings tax breaks when they invested in crucial improvements, the J-51 program encouraged such investments.
In order to make the J-51 program available to all building owners -- even those who owned unregulated (post-1973) buildings -- the J-51 law also permitted an owner of a free-market building—with high market rents already in place—to qualify for J-51 tax benefits upon making qualifying improvements. But they could obtain these benefits only if the owner opted into the rent stabilization system —with initial rent stabilized rents set at then prevailing market rents—for the period of the J-51 abatement, generally 12 years.
Meister says this made sense, since the already high fair market rents forming the basis of initial regulated rents in the fair market J-51 buildings were often above the $2,000 luxury decontrol threshold. Absent this limited exclusion, the owners of such non-stabilized buildings would have been able to commit to being subject to the Rent Stabilization Laws and then immediately decontrol their apartments.
Meister believes the First Department’s decision is wrong, and that Justice’s Lowe’s interpretation and the DHCR regulations should be upheld. “The Luxury Decontrol Law provides that apartments cannot be decontrolled if they ‘became or become’ subject to rent stabilization ‘by virtue of’ receiving J-51 benefits. Since all of the apartments at Stuy Town ‘became’ rent stabilized in 1974, and since Met Life first applied for J-51 benefits nearly two decades later in 1992, it cannot correctly be said that any Stuy Town apartments ‘became’ rent stabilized in 1992 or any later year ‘by virtue of’ the receipt of J-51 benefits. By using the word ‘became’ our Legislature made perfectly clear that if an apartment was rent stabilized before ever receiving J-51 benefits, then that apartment remained eligible for luxury decontrol.
Both the Luxury Decontrol Law and the J-51 program have worked to revitalize the City’s housing stock. Meister says, “By giving tax breaks for quality-of-life improvements and permitting high rent units to go to fair market, the wealthier free market tenants in effect have subsidized the long term rent stabilized tenants. Absent those decontrolled units, the quality of life for long term rent stabilized tenants at Stuy Town would be a far cry from what it is now. Ever since the enactment of Luxury Decontrol, tens of thousands of apartments have left rent stabilization as they were vacated (or their occupants earned more than $175,000 per year) and rents were brought above $2,000 per month under the rent stabilization rules, exactly as envisioned by our Legislature.
“Owners and lenders have long relied on these embedded rules and underwrote and valued buildings based on the ratio of decontrolled and regulated apartments in every building. Many of these buildings will now experience severe rent rollbacks and rent refund obligations absent the Court of Appeals reversing the First Department’s decision,” Meister continued. “Aside from the obvious inequity of changing the rules after everyone relied on them for 15 years, the First Department decision will throw thousands of apartments into foreclosure which would otherwise be successfully carried by the more well-heeled owners through the current tough economic times. This decision is bad for owners, bad for our already distressed banks, bad for tenants, and bad for New York City—both because the City’s housing stock will deteriorate as owners are unable to afford upkeep and because the City will now be forced to refund enormous amounts of J-51 benefits previously withheld by HPD and devalue the tax assessments of J-51 benefitted buildings. Last Friday, the First Department granted a stay of its decision pending review of a motion seeking permission to appeal to the Court of Appeals.”
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