60 E. 12th St. Tenants' Assn. v New York State Div. of Hous. & Community Renewal: Rosenberg & Estis, P.C, successfully represented the appellant, 12 Broadway Realty LLC, in an appeal from various substantive findings made by Supreme Court in connection with the owner's application for MCI rent increases.
In 1995, DHCR granted an MCI rent increase for work that was completed in 1993 and was described in the DHCR order as "RESURF EXT WALLS ETC." Such work has a useful life of 25 years according to DHCR guidelines. In 1998, the DHCR issued an order modifying the rent increase due to the former owner's receipt of a tax abatement. The modified order described the work in the original 1995 DHCR order as "WATERPROOFING, POINTING, MASONRY," which has a useful life of 15 years. At the time, the former owner did not challenge or try to correct the description of the work completed in 1993 despite the discrepancy in the two orders issued by DHCR.
In 2002, 12 Broadway Realty LLC began a series of capital improvements and applied for an MCI rent increase in 2007. The 2007 application claimed that $1,931,013.69 was spent on resurfacing the exterior brick walls of the property. This portion of the MCI application was denied in 2009. DHCR's Rent Administrator noted that the 25-year useful life of the resurfacing supposedly done in 1993 had not expired and the owner did not seek a waiver of the useful life requirement.
The owner requested reconsideration of the denied MCI claim, asserting that there were "numerous irregularities" in the order. The owner stated that the 1995 MCI increase order incorrectly described the 1993 work as "resurfacing" when it should have been described as "WATERPROOFING, POINTING, MASONRY," as it was in the modified 1998 order. The owner therefore argued that it was an irregularity in a vital matter for DHCR "to base denial of an MCI on a failure to exhaust the useful life of a completely different MCI." The building's tenants objected to the reconsideration, stating that the owner had not established any irregularities with the previous orders. The RA issued an order in 2011 stating that there was evidence that resurfacing had been done in 1993 and that the useful life of the work had not expired, however the owner qualified for an MCI rent increase because resurfacing was needed earlier due to the poor condition of the brick. The Deputy Commissioner in 2013 partially granted the owner's PAR and denied the tenants' PAR in its entirety.
Both parties then commenced CPLR article 78 proceedings, which were later joined. The owner sought to modify the 2013 order on grounds that it was arbitrary in finding certain claimed expenses not to be MCI-related. The tenants sought to annul the 2013 order on grounds that proper procedure was not followed, and sought reinstatement of the 2009 order. DHCR moved to remit the matter to itself so it could properly deal with the discrepancy between the 1995 and 1998 orders.
The Supreme Court granted DHCR's motion to remit in 2015, but in doing so, made several substantive rulings that effectively wiped out the MCI increases. The owner then appealed to the Appellate Division, First Department.
On appeal, Rosenberg & Estis, P.C. argued that because the 1995 order granted the former owner 100% of the MCI increase sought, the former owner had no reason to appeal the decision even though the work was mischaracterized as resurfacing. Rosenberg & Estis, P.C. was able to point to a previous case which validated that claim. The court concluded that because of the inconsistency between the 1995 and 1998 orders, the court erred in finding that owner was collaterally estopped by the 1995 order (see Matter of Sherwood 34 Assoc. v New York State Div. of Hous. & Community Renewal, 309 AD2d 529, 532 [1st Dept 2003]). The owner established that its predecessor did not have "a full and fair opportunity to litigate in the prior proceeding" (Gersten v 56 7th Ave. LLC, 88 AD3d 189, 201 [1st Dept 2011], appeal withdrawn 18 NY3d 954 ; see ABN AMRO Bank, N.V. v MBIA Inc., 17 NY3d 208, 226-227 ), since the 1995 order granted the full relief sought by the predecessor (see Parochial Bus Sys. v Board of Educ. of City of N.Y., 60 NY2d 539, 545 ). The case was remanded to the DHCR to determine what work was actually done to the property in 1993.
(Rosenberg & Estis, P.C. Team: Jeffrey Turkel)
Effects of the Rent Act of 2015
The Rent Act of 2015 extended the New York City apartment rent laws until 2019. The Rent Act increased the threshold for high income/high rent deregulation to $2700 per month (Legal Regulated Rent), added indexing to increase this deregulation threshold, and modified the vacancy allowances permitted for apartments leased with a preferential rent. The changes in the language of the statute have created confusion about whether an owner can include legally permitted increases to the legal rent subsequent to vacancy in order to bring the rent of a vacant apartment above the deregulation threshold or whether the apartment rent had to be above the legal deregulation threshold prior to vacancy for the apartment to be deregulated, and whether a preferential rent paid prior to vacancy affects how and when the apartment becomes deregulated. Blaine Z. Schwadel and Nicholas Kamillatos of our firm have hosted two seminars for firm clients to discuss the effects of, and strategies for dealing with the changes in the Rent Act. Blaine and Jeffrey Turkel have also participated in seminars hosted by the Rent Stabilization Association and The Community Housing Improvement Program for their members. Based on our substantial experience we have developed various approaches which we think will best serve owners to best protect the value of their properties, and to properly evaluate the acquisition of properties where high rent deregulated apartments are a substantial part of the rent roll.
Effects of the Court's Decision in Altman
This past April the Appellate Division decided a case that changed the 18 year old analysis of when an apartment became luxury deregulated on vacancy. In Altman v 285 W. Fourth, LLC, the $2,000 threshold in effect in 2005 was exceeded on a vacancy by way of the vacancy allowance. The next tenant did not dispute the exempt status of the apartment for many years. Ultimately, the tenant claimed rent stabilized status but the lower court ruled for the owner. The lower court held that the deregulation was properly based upon the rent charged to the tenant after vacancy, not the rent prior to vacancy. Of course, that has been the accepted high rent vacancy deregulation methodology since June, 1997.
In April, 2015, the Appellate Division, First Department, reversed that ruling, holding for the first time that high rent vacancy deregulation can only occur when the rent of the tenant immediately prior to vacancy exceeded the deregulation threshold. Therefore, in Altman, the Appellate Division ruled that the rent of the tenant who vacated the apartment must have exceeded the deregulation threshold in order for the next tenant in occupancy to be deregulated.
The owner's motion seeking to have the Appellate Division re-consider its ruling or grant permission to go to the Court of Appeals was denied.
This decision will have a substantial impact on the regulated status of numerous luxury deregulated apartments and thus on the valuation of rent stabilized buildings. Altman imposes the risk of rent overcharge liability to both present and past tenants. Until the case can be appealed to the Court of Appeals, probably not until the lower court determines the amount of rent overcharge and possibly after the case again makes it through the appellate process, if at all, we can expect to see numerous high rent vacancy deregulated apartment tenants claiming that their apartment is rent stabilized. How to respond to the issues raised by the Altman decision cannot be summarized in a one size fits all solution. Instead facts pertaining to each apartment, when and under what circumstances it was deregulated, have to be assessed in order for property owners and lenders to properly evaluate the value of buildings containing deregulated apartments. Altman will have a much more significant effect on properties where the prevailing market rents substantially exceeded, and continue to exceed, the deregulation threshold. In neighborhoods and buildings where the deregulation threshold is equivalent to market rents, the effects of Altman will be far less significant, and with the right approach, can be almost entirely avoided. Where your properties fit into this spectrum can be assessed and we can assist you to manage your properties in a way to minimize the effect of the Altman decision, and future court and DHCR interpretations that may result from Altman.
Attorney General §421-a Enforcement Proceedings
On August 25 2015 the Office of the Attorney General issued letters to almost 200 property owners who allegedly were not in compliance with the rent regulation requirements imposed by the 421-a tax benefits on those properties. The letters notified the property owners that they had a one-time opportunity to avoid enforcement action by the Attorney General, the City's HPD and State DHCR if they took certain steps before October 30, 2015 to bring their properties into compliance. The Attorney General requires that each building be brought into compliance with the requirements applicable to previous condominium plans, DHCR rent registrations and obtaining a final Certificate of Eligibility for §421-a tax benefits. We are currently representing clients with respect to compliance with all three aspects of the Attorney General's demands. If you have received a copy of this August 25, 2015 letter you should contact your attorney here at Rosenberg & Estis, P.C. to discuss how to timely comply with the substantive requirements. Failure to comply could result in partial or complete revocation of tax benefits and restrictions against filing future condominium plans with the Attorney General. The cost of such revocation of tax benefits may exceed any rent overcharge liability which may result from registering the apartments with DHCR and notifying the current tenants. It may be in your interests to comply with the Attorney General's demands and obtain the offered 'amnesty'.