United States: Real Estate Litigation Alert - March 19, 2015

Attorney General Cracks Down on Improper Receipt of § 421-a Benefits — What Property Owners Must Now Consider

By Jonathan L. Adler

The New York State Attorney General's Office's Joint Enforcement Task Force is conducting a sweeping investigation of New York City property owners who have received tax exemptions under Section 421-a of the New York Real Property Tax Law. The Attorney General seeks to ensure that property owners who received tax benefits strictly complying with § 421-a's affordable housing and prevailing wage requirements.

The penalties for non-compliance are steep. The investigation has recently yielded multiple large settlements and fines borne by New York City property owners, as a result of non-compliance with prevailing wage laws and insufficient rent-stabilized apartment units in the building. Property owners should be aware that the Attorney General's Office has sent letters out to building owners receiving an exemption under § 421-a. These letters seek information on rent-rolls, rent-regulation status and wages to building service workers, among other things. Building owners that are not responsive to the letters have been receiving subpoenas from the agency. Recipients of the letters are owners receiving the exemption that: (i) have 50 units or more, and (ii) commenced construction after December 27, 2007.

If you own a building in New York City and have received § 421-a benefits, you must ask the following questions:

Was the building constructed after December 27, 2007, and does it have 50 or more units?

For those buildings that do not have the requisite number of affordable housing units, then any building service workers employed in the building (e.g., cleaners, doorpersons, porters, etc.) must be paid prevailing wages.

Does the building have employees and are they being paid prevailing wages?

As prevailing wages far exceed, and sometimes more than triple, minimum wage, paying the prevailing wages may be daunting. For example, the prevailing wage for a porter/cleaner in residential buildings exceeds $30/hour. For those who are required to pay the prevailing wage, the Attorney General's Office is seeking back pay for these employees dating back to the inception of the § 421-a benefit (potentially several hundred thousand dollars), plus a fine of 50% of that amount.

Are at least 50% of the units rent-stabilized with DHCR?

A building owner who is renting units in the § 421-a building and is not paying prevailing wages must have at least 50% of its units rent stabilized. In some instances, the consequence of non-compliance is forfeiture of § 421-a benefits previously received and severe per-unit fines for all units not in compliance.

The Living Wage Law: An Action Plan for Commercial Leases

By Mara B. Levin and Michael Berengarten

On September 30, 2014, Mayor Bill de Blasio signed Executive Order No. 7, the "Living Wage for City Economic Development Projects" ("Executive Order"). The Executive Order requires employers who employ individuals at economic benefit projects, which receive more than $1 million in subsidies from NYC, to pay their employees at least $11.50 per hour if the employer provides health insurance and at least $13.13 per hour if the employer does not provide health insurance.

In addition, the Executive Order significantly expanded the Wages for New Yorkers Act (the "Living Wage Law") by extending the living wage requirement to entities that do not receive direct financial assistance from New York City, but simply occupy space or perform services in subsidized commercial properties. The Executive Order applies to all "Subsidy Recipients" as well as all tenants, subtenants, leaseholders, sublease holders, and concessionaires of the Subsidy Recipient that occupy property improved or developed as part of a New York City economic benefit project.

The Executive Order defines "Subsidy Recipient" as any entity or person that receives financial assistance of $1 million or more as part of an economic benefit project or any assigned or successor in interest of such real property. Thus, commercial tenants that lease space from a "Subsidy Recipient" are covered under the Executive Order and must pay their workers the living wage rate. The Executive Order applies on a going forward basis only, and not to commercial tenants currently leasing space in a City-subsidized project.

In connection with all future lease and renewal negotiations (and the exercise of options to renew with or without amendment), each New York City commercial tenant should take at least the following actions to determine if the Living Wage Law affects its property or business:

  • Confirm if the property is exempt from the Living Wage Law. If the property is a qualifying affordable housing project, it may be exempt altogether. Manufacturers and small businesses with annual gross income under $3 million are exempt.
  • Check the City's "Covered Employers List" to see if the property is listed.
  • Check the City's "Annual Reports" to see if the property is listed.
  • Determine if the landlord of the property is in the process of negotiating a project agreement. An inquiry as to whether a specific landlord is negotiating a project agreement with the City economic development entities must be submitted to the individual entities via a Freedom of Information Act request.
  • Ask your landlord whether it has received financial assistance and is subject to the Living Wage Law. Consider adding representations concerning its compliance with the Law in the Lease.

New York is Combatting and Criminalizing Abuses of the Minority and Women-Owned Business Enterprises Programs

By Victor J. Rocco

The findings and recommendations of a grand jury empaneled by Manhattan District Attorney Cyrus R. Vance regarding widespread fraud in the minority and women-owned business enterprise programs (WMBEs) has caught the attention of the District Attorney and other law enforcement agencies including the New York City Department of Investigation and the Port Authority of New York and New Jersey. These entities favor aggressive enforcement of WMBE program requirements, enhanced criminal and civil penalties and zero tolerance of abuse. Construction contractors are the primary target.

New York City and State both have programs to provide opportunities for women and minorities to qualify for government procurement contracts, especially in the construction industry. To qualify, contracting agencies must require that a percentage of the work to be performed be set aside for women and minorities. Unfortunately, the success of these programs has been more modest than anticipated. Fraud and abuse has been prevalent in the procurement process, often occurring through schemes using "pass throughs" "and "flip-flop" workforces, and has been condemned as reinforcing the cultural and structural barriers to rightful entry into the industry.

To combat these issues, the Grand Jury recommended significant reforms to the MWBE procurement process, including stronger accountability for contractors and MWBEs, increased resources for certifying and contracting agencies, changes to New York's Scheme to Defraud Statute and increased penalties for abuse.

Construction contractors should take affirmative steps to ensure compliance with the requirements of MWBEs and its certification processes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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