On October 22, 2009, New York's highest court, the Court of Appeals, held that landlords cannot deregulate rents on units under luxury decontrol provisions of the Rent Stabilization Law ("RSL") while accepting public tax incentive benefits. A four to two majority of the Court decided in Roberts v. Tishman Speyer Properties that a "practical" reading of the Rent Regulation Reform Act of 1993 ("RRRA"), and of sponsors' statements on the floor of the Legislature when the measure was being debated, indicate the statute "carved out an exception to luxury decontrol" for units that received tax benefits. Many are predicting the decision to have a decidedly negative impact on the value of apartment buildings in New York City.
In New York City, many rental apartments are subject to strict limitations on rent increases. The most common form of rent increase limitation is known as rent stabilization, which also requires landlords to offer renewal leases to existing tenants. Apartments often remain subject to these rent limitations even after existing tenants vacate their apartments.
Also in New York City, multiple dwellings may qualify for tax incentives designed to encourage rehabilitation and improvements. Specifically, the City's J-51 program allows property owners who complete eligible projects to receive tax exemptions and/or abatements that continue for a period of years. Rental units in buildings receiving these exemptions and/or abatements are generally subject to rent stabilization for at least as long as the J-51 benefits are in force.
Under the RRRA, landlords can declare units eligible for decontrol (known as "luxury decontrol") when the regulated rent reaches $2,000 a month by legal incremental increases and, for occupied apartments, the annual household income of occupants has passed $175,000 for two years in a row. The idea behind luxury decontrol is that rent regulation benefits should be discontinued for tenants who have the wherewithal to pay market rates.
The RRRA carved out an exception to luxury decontrol, providing that it "shall not apply to housing accommodations which became or become subject to" J-51 benefits. However, a 1996 advisory opinion from New York State's Division of Housing and Community Renewal ("DHCR") determined that J-51 units are only precluded from luxury decontrol in cases "where the receipt of J-51 benefits is the sole reason for the accommodation being subject to rent regulation".
In the case of Roberts v. Tishman Speyer Properties, nine plaintiffs, all tenants of the Peter Cooper Village and Stuyvesant Town complex in Manhattan's East Side (the "Complex"), contended that thousands of units in the Complex were illegally decontrolled by Tishman Speyer and MetLife, the previous owner. Since 1992, MetLife and Tishman Speyer have received more than $25 million under the J-51 tax incentive program for improvements to the Complex. At the same time, after the RRRA was enacted in 1993, MetLife, with the DHCR's approval, began charging market rate rents for those rental units in the properties where the conditions for luxury decontrol were met. MetLife, Tishman Speyer and the DHCR believed that, since the Complex had become subject to rent stabilization in 1974, it was entitled to make use of the luxury decontrol provision, as receiving the J-51 benefits was not the sole reason for the Complex being subject to rent regulation.
The Court of Appeals disagreed and reversed 15 years of industry and government practice by stating that landlords are never entitled to take advantage of the luxury decontrol provisions of the RSL while simultaneously receiving tax incentive benefits under the J-51 program. The Court ruled that it did not owe deference to the 1996 advisory opinion from the DHCR because it was an issue of pure statutory interpretation, as opposed to an issue where specialized knowledge is necessary.
As a result of this ruling, at least one-quarter of the 11,200 units in the Complex have illegally been subject to luxury decontrol and if, as expected, the lower courts will apply this ruling retroactively to roll back all rents that were raised beyond what would have been allowed under the RSL, Tishman Speyer and MetLife could owe tenants at the Complex about $215 million in rent overcharges.
The ruling's impact, however, will be felt all over the city where up to 80,000 apartment units may have, under the Court's decision, become unlawfully deregulated. In addition to the direct impact of this decision on renters whose rents may now be reduced, the decision adds uncertainty to the commercial residential real estate market in New York City. In addition to the J-51 tax abatement program, there are other programs under which real estate taxes are reduced, or future tax increases are abated, such as the 421-a program and the Senior Citizens tax abatement program. Tenants in buildings subject to these programs may also seek rent reductions, and this will most likely result in substantial continuing litigation.
For the foreseeable future, investors may want to be guided by the views expressed in the Court's dissenting opinion, that predicted the ruling would have dire financial consequences for landlords within the industry and that it would "take years of litigation over many novel questions to deal with fallout from today's decision".
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