The state’s highest court dealt a financial blow on Thursday morning to the already beleaguered owners of the sprawling Stuyvesant Town and Peter Cooper Village complexes in Manhattan when it ruled that they improperly began charging market rents on thousands of apartments.
The ruling by the Court of Appeals may mean that the current owner, a partnership of Tishman Speyer Properties and BlackRock Realty, and the former owner, Metropolitan Life, may have to pay an estimated $200 million in rent overcharges and damages to tenants of about 4,000 apartments.
In a majority ruling (two of the six judges dissented), the court said the owners improperly raised rents beyond certain set levels at the complexes while receiving tax breaks from the city for major renovations.
The decision could also affect landlords of as many as 80,000 apartments across the city who may also have improperly raised rents and deregulated apartments while receiving special tax breaks.
Tishman Speyer Properties and BlackRock, which purchased the properties in 2006 for a record-breaking $5.4 billion, are already under enormous financial pressure. The partnership is running out of cash to pay building loans and could default within the next several months.
In its decision, the court acknowledged that the developers had predicted “dire circumstances for our ruling, for themselves and the New York City real estate industry generally.” But the court pointed out that numerous unresolved issues could lessen the amount of money the owners may have to repay. And “if the statute imposes unacceptable burdens, defendants’ remedy is to seek legislative relief.”
Tishman Speyer released a statement characterizing the decision as “an unfortunate outcome for New York.”
“The ruling, which reverses 15 years of government practice, raises a number of difficult issues that will need to be resolved by the courts and various government agencies in the coming months and years,” the statement said.
Shortly after the Tishman Speyer partnership bought the complex in late 2006, nine tenants of seven apartments in the complexes filed suit claiming that the landlord had improperly charged market-rate tenants for thousands of apartments while collecting more than $24 million in tax breaks since 1992 under the city’s J-51 housing program. The program was intended to encourage landlords to rehabilitate their properties by providing tax breaks on the cost of various building improvements or renovations.
In March, the Appellate Division of the State Supreme Court ruled that the landlords had indeed improperly raised rents and decontrolled apartments. That decision galvanized much of the real estate industry, which submitted briefs on behalf of the Tishman Speyer partnership.
They argued that the court had misread the state law, which did not prevent landlords who received city tax breaks for building improvements from deregulating apartments, and had overturned “15 years of real estate industry practice that had been endorsed by two government agencies with primary responsibilities in this area.”
Alexander H. Schmidt, a lawyer who represented the original nine plaintiffs in the class-action case, said he was thrilled by the decision, not just for his clients but also for the “thousands of current and former market-rate tenant class members they represent.”
“The court’s ruling is a landmark victory for them and for similarly situated tenants citywide,” he said. “We hope that, now that their appeals on the governing issue of law have been exhausted, Jerry and Rob Speyer, the Tishman organization and MetLife will do the right thing by the tenants, and for the good of the city, by acting quickly to resolve all of the class members’ rent overcharge claims by settling this case, and ending the litigation.”
In a strongly worded dissent written by Judge Susan P. Read and joined by Judge Victoria A. Graffeo, the idea that the developers’ “losses ultimately will turn on legal issues and defenses yet to be resolved is cold comfort.”
“In the absence of meaningful legislative action, uncertainty will reign in an industry already rocked by the bursting of the great residential real estate bubble,” the dissent continued.
The majority ruling did not specify a remedy; developers fear that they could have to pay treble damages and rent rebates dating back as many as four years, or at least to the point at which an apartment was deregulated. Some lawyers suggest another possibility: landlords would repay any tax benefits for deregulated apartments, but would not be forced to repay affected tenants.
There are about one million apartments with regulated rents in New York City. Over the past two decades, landlords have lobbied successfully to loosen those restrictions. Under state law, landlords can deregulate an apartment when the rent for a vacant unit reaches $2,000 or more per month, or the rent is above $2,000 and a tenant’s household income is above $175,000 for two consecutive years.
Once the apartment is deregulated, there are no restrictions on the landlord’s ability to raise the rent.
Landlords are also allowed to pass along a portion of the cost of major renovations to the tenants. At Stuyvesant Town, for instance, the landlord routinely spent about $40,000 renovating vacant apartments and as a result was able to impose a $1,000 a month rent increase. As a result, the total rent would exceed the $2,000 threshold and the landlord was permitted to charge market rates.
“No one has a good handle on how many thousands of units throughout the city that will be impacted by this decision,” said Joseph Strasburg, president of the Rent Stabilization Association, which represents 25,000 landlords and building managers. “It’s clear that it has not only the potential to force some buildings into bankruptcy or foreclosure if they’re required to roll back rents, but it would also have a direct impact on the city budget.”
The state housing agency, the Department of Housing and Community Renewal, could be inundated with petitions from tens of thousands of tenants claiming that they had been overcharged by a landlord receiving tax breaks, as well as from landlords disputing the claims.
Each property could require a separate hearing. At the same time, assembling a rent history for tens of thousands of apartments potentially affected by the decision could be a mammoth task requiring the housing agency to hire additional workers.
Mr. Strasberg has in the past said that landlords for as many as 80,000 apartments would be affected by the ruling. But on Thursday, he said that “no one knows” exactly how many, although he suggested that it was mainly a problem for property owners in Manhattan, where rents are more likely to exceed $2,000 a month. But there are now also wide swaths of Brooklyn and Queens where that is the case.
Stuyvesant Town and Peter Cooper Village, long a middle-class oasis in Manhattan for teachers, firefighters, nurses and even some politicians, has been at the center of a storm ever since Metropolitan Life sold the complexes in 2006 for $5.4 billion. The sale came amid a housing boom, in which the demand for luxury housing seemed insatiable, even as tenant advocates decried the loss of apartments affordable to lower and middle-class New Yorkers.
“This is a huge win for tenants,” said Daniel R. Garodnick, a city councilman who lives at Peter Cooper Village. “The court made it clear that you cannot pocket millions in taxpayer dollars while pushing rent-stabilized tenants out of their homes. That practice ends today.”
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