The state’s highest court has spoiled Tishman Speyer’s not-so-carefully laid plan to charge luxury rents at Stuyvesant Town and Peter Cooper Village, a once – and maybe future – bastion of the working and middle class.

Thousands of apartments that now rent for as much as $5,916 a month should never have left New York City’s rent stabilization programs, according to a Court of Appeals ruling last week. Now these apartments must return to rent stabilization — and potentially have their rents adjusted steeply downwards.

“This is a tremendous victory for tenants and taxpayers,” said City Councilman Dan Garodnick, who lives in the complex and has been pushing the tenants’ case.

The ruling will have huge implications across the city. Some buildings affected by the ruling that now wobble on the brink of foreclosure may be pushed over the edge. But tenants in these buildings will now have the protection of rent stabilization law if their buildings go through the foreclosure process, starting with eviction protections. And many tenants who now pay high, unregulated rents for thousands of apartments affected by the ruling could potentially receive a massive windfall, once officials and lawyers finally work out the ruling’s full implications.

The lawsuit

The lawsuit pitted nine residents at Stuyvesant Town and Peter Cooper Village against the current and former owners of the properties. The tenants contended the owners were not entitled to remove more than 4,400 apartments at the properties from rent stabilization, because the owners were receiving tax breaks under the city’s J-51 program.

That program offers abatements and exemptions of city property taxes to property owners who finish major capital improvements or building-wide renovations. “Rental units in buildings receiving these exemptions… are generally subject to rent stabilization for at least as long as the J-51 benefits are in force,” according to the majority opinion of the Appeals Court, issued Oct. 22.

But for the past 15 years, the state’s housing agency, the Division of Housing and Community Renewal (DHCR), allowed many J-51 landlords to take apartments out of rent stabilization under the rules of luxury decontrol, which apply to empty apartments that rent for more than $2,000 a month, or occupied apartments that both rent for more than $2,000 a month and are occupied by residents whose household income is more than $175,000 a year. Luxury decontrol was passed by the legislature in 1993 and expanded in 1997.

Here’s the catch. Luxury decontrol doesn’t apply to properties that are rent stabilized “by virtue of” the J-51 tax break, according to the language of the law. DHCR issued program rules in Dec. 2000 (in part 2520, Section 13, subdivision s) that interpreted the law to allow luxury decontrol at rent-stabilized J-51 properties that were rent stabilized for multiple reasons, not just because of J-51.

The court’s ruling blows that interpretation out of the water. The majority opinion of the court calls DHCR’s interpretation of the law “contrary to the plain text of the statute. ‘By virtue of’ and ‘solely by virtue of’ simply do not mean the same thing.” Now after 15 years of luxury decontrol, any building that gets the J-51 tax break is ineligible for luxury decontrol.

The lawsuit was filed in 2007, just months after Tishman Speyer purchased the properties. The State Supreme Court sided with the landlords, but the tenants have won the appeal. The decision is unlikely to be reversed, since it comes from the highest court in New York state.

Tishman’s troubles

The decision is a punishing defeat for landlords like Tishman Speyer who paid exorbitant prices for rent-regulated apartments during the real estate boom. Many of these landlords planned to remove the rent regulations from the apartments they bought and raise rents. For example, Tishman Speyer paid $5.4 billion in 2007 for more than 11,000 apartments at Stuyvesant Town and Peter Cooper Village. That works out to more than $500,000 per apartment – a price that only makes sense if the apartments can be rented for much more than rent stabilization currently allows at the properties.

The plan ran into trouble almost immediately. Rent regulations proved more tenacious than the landlords anticipated. There are now more than 4,400 apartments at Stuyvesant Town and Peter Cooper Village without rent regulations, compared to roughly 3,000 when Tishman Speyer purchased the properties. Based on their current rental income, without including rosy projections for future rent increases, the properties are worth $2.13 billion, according to credit rating company Realpoint LLC. That’s less than half what Tishman Speyer paid for them.

The properties are well on the way to foreclosure. The owners have had to use a $400 million interest reserve and a $190 million general reserve fund to make their mortgage payments on a package of loans.

“The reserve will most likely be depleted by the end of the year. Moody’s expects the loan to be transferred to special servicing at the latest when the interest reserve runs out,” according to a rating action on Oct. 23, the day after the court’s decision, by credit rating agency Moody’s Investors Service. Special servicing is a major step on the route to foreclosure.

The decision of the appeals court is likely to hurry the property towards a seizure by its lenders. The court decision makes it clear that many apartments never should have left rent stabilization. But the ruling leaves many, many questions unanswered that may have to be fought out in court, according to DHCR spokesman James Plastiras. It does not specify whether rents should now be lowered to the price they would rent at if the apartments had not left the rent stabilization program, or how these prices will be determined. Also, it’s not clear whether landlords will have to return millions, or even hundreds of millions of dollars in rent to overcharged tenants. Once those questions are answered, state officials may face more problems.

“DHCR is facing an administrative nightmare,” says former city housing official Harold Shultz, now a senior fellow at the Citizens Housing and Planning Council. “How will they determine rents in a unit which was decontrolled but had multiple tenancy change-overs? If refunds are required for tenants no longer in occupancy, how will they be determined or claimed?”
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Tenants protected

The ruling also affects hundreds of thousands of residents. First, tenants at the 350,000 units of housing that receive J-51 tax breaks will no longer be under pressure from landlords eager to deregulate their apartments and raise the rents.

That’s an important protection for tenants at J-51 properties like Stuyvesant Town wobbling on the edge of foreclosure. The new strength of the rent regulations on these buildings may discourage another round of speculators from buying the foreclosed buildings as prices fall.

“Hopefully displacement will be scrubbed out of the business plan,” says David Powell, director of organizing for Tenants & Neighbors, “so that speculators who bank on displacement will be dissuaded.”

That could be the net gain for the preservation of affordable apartments in New York City. Nonprofit organizations – or city entities – interested in buying affordable properties and keeping them that way likely will face much less competition in the marketplace from for-profit companies.

And nonprofit housing groups are the likely acquisitors and redevelopers of foreclosed properties, too. Although tenants are as vulnerable as ever to the typical deterioration of maintenance at properties in or nearing foreclosure, the sheer volume of units in this situation today has at least drawn more attention to these tenants’ plight.

Tenants like the nine that filed the suit will also benefit as their apartments become rent-regulated again, limiting further increases, possibly lowering their rents, and potentially providing them with a huge windfall in reimbursement for overpaid rents equal to the difference between the new, lowered rent and the rent paid by tenants over the years. For example, a Stuyvesant Town resident who paid $3,000 a month for the last year for an apartment that would have cost $2,000 under rent control could claim $12,000 in compensation.

“Our position is that the tenants were overcharged and the tenants should be compensated for it,” says Powell, though it’s an open question how limited partnerships that own properties like Stuyvesant Town will be able to reimburse tenants while they default on their mortgages.

These families are unlikely to be poor, since they have been paying unregulated rents for their apartments, sometimes for years, sometimes since they moved in. Some may be well-off. Since 1997, thousands of apartments have left the rent stabilization program because of the income of residents was above $175,000 a year for two years in a row, according to the Rent Stabilization Association.

How big a splash

Housing experts are scrambling to count how many properties are affected by the ruling: at present officials can’t say how many apartments at properties that claim J-51 tax abatements throughout the city have been taken out of rent stabilization. Estimates range from 35,000 to 80,000.

Overall, 350,000 units of housing in over 8,000 buildings receive J-51 tax breaks from the city, according to CHPC. The properties include a tremendous range of buildings and probably include many overleveraged buildings, since the new owners are likely to have completed some major capital improvements.

Properties carrying too much debt that may already have been headed toward foreclosure will only get a push in that direction from the ruling. Housing advocates estimate up to 70,000 apartments could be overleveraged, with loans that are larger than the current value of the properties based on their income. The Department of Housing Preservation and Development estimates the number could be even higher. HPD counts as potentially overleveraged any property that carries debt equal to more than seven times the annual rental income earned at the property.

The ruling also affects an unknown number of J-51 properties where landlords made no special effort to take units out of rent stabilization, but simply followed the guidelines issued by DHCR. These properties are likely to have some apartments that had left rent stabilization and will now go back.

Apartments across the city are already under pressure because of the high cost of property taxes, water and sewer bills, and heating fuel. Many smaller buildings are already losing money, according to the landlords’ Rent Stabilization Association. “Now you may see larger buildings flowing into that category,” says Frank Ricci, RSA director of government affairs.

Despite the very real possibility of foreclosure, some residents at the massive complex on Manhattan’s east side are hoping the return of rent stabilization will make the area feel more like the neighborhood – and less like the extra dormitory for well-funded college students – that it used to be.

Before new ownership in 2007, “You never saw moving vans in Peter Cooper Village or Stuyvesant Town. Now you see them every week,” says John Marsh, co-chair of the tenants association. “The ruling will restore stability.”

– Bendix Anderson