Tenants Allege Landlord Flouts Rules, But Still Gets Tax Break

“Enough already!” shouts Judge Marc Finkelstein who is presiding over landlord-tenant cases in Room 407 of Kings County Housing Court, located at 141 Livingston Street in downtown Brooklyn. “I’m asking again, will you settle this case?” He implores both the plaintiff, Two Trees Management Co., and the defendants, tenants Jeffrey Goodman and Gregg Bromberg, to make a deal.

On that day in November, Finkelstein pressures the tenants, telling them in open court that they stand to lose more money in legal fees because of the length of time the case has been in court, and suggests they vacate their apartment at 125 Court Street, and pay the landlord, Two Trees Management, what it claims they owe: an impressive sum of money, approximately $187,000. The judge suggests a settlement of the case at a slightly lower amount, despite the three leases that failed to mention the apartment’s rent-regulation status and at least two very different simultaneous rent registrations for the exact same apartment that have been entered into evidence.

The case between Two Trees and Goodman-Bromberg is crimping Finkelstein’s packed schedule in Housing Part, where he usually hears an average of 65 cases a day, resolving past-due rents for low-income tenants and ordering basic repairs and delivery of heat and hot water. He often recommends subsidies for tenants who’ve fallen behind on their rents. There is an office adjacent to the courtroom that manages such benefits.

Finkelstein is not in the habit of litigating long drawn-out cases concerning back-rents. But this case is different. For one thing, it involves an apartment whose monthly stated rents in just a matter of two years ranged wildly from $3,900 to $17,000, between the landlord’s voluntarily lowered rents, known as preferential rents, and what they claim is the legally permitted charge for the apartment.

Gasps can be heard coming from the small number of people in the courtroom when they overhear the amounts that are discussed. “It must be for commercial rent,” says Doreen Watt, a licensed security officer. She’s waiting for her case to be called before the judge. When she hears that it’s for a residence, she says, under her breath to another woman sitting near her, “Oh God have mercy on my soul.”

As persuasive as the judge attempts to be, neither party will concede. So, the case lurches forward, requiring the judge to spend more days on the case, delaying several hundred of his “regular” cases. The judge admits in court that he doesn’t know much about the 421-a tax abatement law, which doesn’t bode well for Goodman and Bromberg, since that statute is central to their case. In an unusual tactic for tenants, they are claiming landlord fraud under 421-a.

“Landlord fraud is extremely common,” says Shawn Blumberg, Director of Legal Services at Housing Conservation Coordinators (HCC), a NYC-based tenant protection group. “It is the information, the wherewithal and the willingness to pick a fight with your landlord that can be rarer.”

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The 421-a program was established in the 1970s to incentivize real-estate developers to build at a time when New Yorkers were increasingly moving out to the suburbs, when there existed a need for more housing in the city. Through the program, real-estate developers received abatements on property taxes for the period of 10-25 years. Today 421-a is designed to encourage real-estate developers to include affordable housing.

But for both market-rate and affordable apartments in buildings receiving 421-a benefits, the quid pro quo is clear: Landlords must follow rent-stabilization guidelines for all units. That means annual rent increases are dictated by the Rent Guidelines Board. Landlords are also allowed a 20 percent rent increase upon vacancy. Landlords who invest (or claim to invest) in major renovations to a single apartment or the whole building can file for larger rent hikes under the “individual apartment improvement” or “major capital improvement” provisions, but those provisions don’t appear to be a factor in the 125 Court Street case.

Goodman and Bromberg’s most recent case, filed in 2014, is based on the contention that Two Trees has been violating 421-a requirements at 125 Court Street, since the building was occupied in 2005. But recent reports in the media and from public officials suggests their claims echo allegations involving more than a thousand landlords receiving 421-a tax abatements.

Just last week, state Attorney General Eric Schneiderman announced that 128 landlords who were getting 421-a tax benefits but failing to register their apartments as rent-stabilized had entered into settlements with state and city agencies. The 1,823 apartments involved were part of a larger group, involving 194 landlords in total, exposed by a Schneiderman investigation earlier this year. The 52 remaining landlords now face “enforcement actions,” according to the attorney general’s office.

But there is evidence that the AG’s effort only scratches the surface. A November Pro Publica article found that state and New York City officials have failed to crackdown for years on the problem of landlords ignoring 421-a rules despite “pleas to investigate.” The report estimated that there are as many as 50,000 apartments across the city not listed as rent-stabilized that should be, because they are collecting 421a tax abatements.

The bad publicity could trigger more allegations of 421-a fraud, and more cases in housing court, which right now is the least expensive means of redress for such disputes. But Bromberg and Goodman’s experience illustrates how difficult the court process can be.

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Goodman and Bromberg a married couple together for 30 years, and another tenant from the building involved in a separate but similar case, Nancy Sher, have emptied their bank accounts, spent their retirement funds and borrowed money from friends to keep their legal fight going. Sher has been told to leave her apartment but is appealing. Another neighbor was part of the effort, too, but lost and was evicted. The three tenants still involved say they have paid more than $150,000 combined during the fight, in legal fees. There have been health and emotional costs, too, they say, including high blood pressure, panic attacks, and depression, to name a few.

It was a casual chat while riding an elevator and sharing rent-increase horror stories with other tenants that Bromberg and Goodman first learned that their building was in the 421-a tax abatement program, and was therefore protected by rent stabilization law—a fact that was kept well-hidden from tenants, they say. When they first discovered their true status as rent stabilized, as many as 12 of the tenants organized to force the landlord to abide by those rules. But the original group has dwindled as some tenants reached settlements with the landlord and some moved away, unable to manage the emotional and financial toll.

The main disputes in the Goodman-Bromberg trial are about rent increases and building conditions. Their monthly “preferential” rent jumped from their original lease, which was $3,900 in 2010 to $4,500 in 2012. Then, during a period of a year and a half, they claim they were subject to arbitrary rent increases from month to month, until finally they received a lease in January 2013 for $6,836. During the current court case, Finkelstein approved the rent of $6,836 per month, without ever having established the actual legal rent. On one lease in 2012, $17,000 was listed as the apartment’s “legal” registered rent.

Building conditions are another issue. Department of Housing Preservation and Development (HPD) records indicate a low number of code violations at 125 Court Street, but the tenants who’ve sued say reality is different. “The building is plagued with water intrusion and mold, and while it is attractive at first glance and is touted as ‘Luxury Living,’ the fixtures in the apartments belie such a claim of opulence,” says Sher. Records show that of the original 256 market rate tenants who moved into the city-subsidized building in 2005, only 13 remain, a shockingly low number.

At one point, 10 of the building’s tenants were in Supreme Court aiming for a class action suit. They blame poor advice from lawyers, in particular the suggestion that they stop paying rent, for giving Two Trees a chance to move the case to Housing Court.

“Suddenly we’re cut off from the motherlode, and left as deadbeats in housing court,” says Sher. She was ordered evicted in early November but is appealing. So is Two Trees: Even the judge who ordered Sher to vacate saw fit to order a 40 percent discount on a portion of back rent she owes, because of the mold issues. Two Trees is fighting that part of the ruling.

In the course of their legal battle, the tenants obtained through Freedom of Information Law requests documents pertaining to Two Trees’ application for 421-a tax benefits. Among them were two letters from the HPD Office of Development’s Division of Housing Incentives, addressed to Two Trees’ tax attorney Robert Pollack. One of the letters indicated to Two Trees that they were not in compliance, because they had listed 256 market rate apartments as “exempt.” In a letter dated June 14, 2011, HPD communicated this to Pollack:

All units must be registered as rent stabilized with DHCR. 256 units are currently listed as “exempt.” This is not allowed. In addition, the rents registered are above the HPD approved amount. Please revise your DHCR registration so the rents are within HPD guidelines and all units are rent stabilized.

Yet, since 2005, despite HPD’s notices of non-eligibility, Two Trees has continued to receive 421-a tax benefits. Two Trees has claimed in court papers that it corrected the registrations, but tenants question that: They report that the management office continues to tell tenants that their units are exempt from regulation.

HPD is charged with enforcing the 421-a tax abatement program, but when it comes to owners’ rent-registration practices it relies on information given to them by the state DHCR.

“Owners are required to comply with laws of rent regulation and provide tenants with safe and decent housing. The Office of Rent Administration was created as a regulatory agency – not an enforcement entity – and provides services to both tenants and owners,” said DHCR in a statement to City Limits. “The 421a program is administered and enforced by the City Department of Housing Preservation and Development and the Department of Finance. Initial rents are established by the administering agency.”

For its part, HPD says that a Final Certificate of Eligibility for 421-a has not been issued at 125 Court Street, despite a lengthy back-and-forth with the owner. Despite the agency’s concerns about the company’s compliance, HPD hasn’t moved to revoke its tax break—that’s complicated, apparently.

That means Two Trees has been receiving the yearly million-dollar benefits without an approved certificate for nine years.

“HPD is committed to ensuring that landlords who accept valuable tax benefits comply with their obligations. We worked hard to change the structure of the 421-a program, so that in the future all eligibility requirements will need to be met before any benefit is issued,” said HPD in a statement. “In the meantime, we have strengthened our efforts to monitor and enforce compliance, investing in the technology and staffing we need to identify those owners who aren’t playing by the rules, and cooperating across agencies and levels of government to use all of our enforcement powers. Most building owners do the right thing, but we will not allow anyone to skirt their responsibilities. We are engaged in a multi-stage, multi-agency enforcement effort with the State Attorney General and DHCR and will not stop until every property is brought into compliance.”

Two Trees, meanwhile, says the problems with rent registration at 125 Court Street affected a small number of apartments and a mere fraction of its rent roll. “We are working with HPD to correct our administrative oversight and receive the final certificate,” the company says.

A Two Trees spokesperson claims that “all the apartments at 125 Court Street, both market rate and affordable, are registered and subject to rent increases under stabilization.”

“We have proudly participated in the 421-a program, meeting our commitments to deliver integrated affordable housing in some of the city’s finest luxury rental buildings. Two Trees provides exceptional service in all of our buildings, but these isolated tenants, who did not pay rent until ordered by a judge, have made that impossible by barring access to their apartment for maintenance,” says Two Trees. “This incident is in no way reflective of conditions in the building.”

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The mechanism at play in the 125 Court Street dispute—one that tenant advocates have said is problematic even when there’s no allegation that landlords are bucking the rules—is “preferential” rent, where the landlord states two rent amounts on each lease.

One is the “legal” rent, which is what a landlord is permitted to charge under rent-stabilization rules. The other, lower figure is a preferential rent. In markets where the legal rent is higher than renters will pay, the landlord accepts a lower amount. However, according to 421-a law, the first rent charged is the legally binding rent on which all subsequent RGB increases must be based. It appears to be a good deal for tenants, in the short run.

In the long-run, however, it means landlords can game the system by hiking the rent in a stabilized apartment much faster than the Rent Guidelines Board’s annual increases would permit. Landlords do this by reducing the discount they provide, sometimes by dramatic amounts. The result? The “legal” rent might not rise by a greater percentage than the RGB mandates, but the rent paid by the tenant does.

At 125 Court, however, there are also questions about the legal rent that Two Trees has claimed it was permitted to charge. Under a provision of the 421-a law that has since been rescinded, but was applied to 125 Court, Two Trees was required to price the first rents at 125 Court Street at 15 percent lower than the average rent in the area at the time. In 2005, the average market rate rent for a comparable apartment in Brooklyn Heights was about $2,800. So it is unclear how a legal rent at 125 Court could have reached $17,000 as presented in Bromberg renewal lease for 2012.

“It’s increasingly common for landlords to use the false ‘legal rent’ as the basis for increases upon expiration of the old lease with the ‘preferential rent’ as part of a large pattern of landlord’s criminal fraud which is becoming common place; and most city and state agencies are not taking effective action to halt. The law really is what you can get away with,” says Martin Needelman, co-executive director and chief counsel at Brooklyn Legal Services Corp A.

Two Trees established a legal rent at 125 Court far in excess of what is HPD-approved, a “fictitious” number, says Serge Joseph, a partner at Himmelstein, McConnell, Gribben, Donoghue & Joseph, a tenant rights and representation law firm in New York City, who is not involved in the case. “There’s no way the landlord could collect, $17,000, for instance, on the apartment. “The DHCR registration process is ripe for abuse by unscrupulous landlords,” he says, “It’s a problem that the landlords’ ability to unilaterally eliminate or remove ‘preferential rents’ previously charged to the tenant encourages malfeasance by landlords and lulls tenants to a false sense of security.”

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Sher was three-months pregnant with twins when her husband was diagnosed with a terminal brain tumor. He died in 1996. One of the original tenants, she moved to 125 Court Street with her daughters so they would be closer to the school they were attending.

She thought she would never again encounter such a trauma as her husband’s death, but she says her experience at 125 Court Street, with Two Trees, city and state administrative and regulatory agencies, the legal profession, elected officials, and the court system has given her pause. She says, “The defining difference is there was absolutely no cure for my husband’s glioblastoma, everything was experiential, as difficult as that was to accept. However, in the case of 125 Court Street there is an absolute and known cure, the law. But no one, and I mean no one, who has the capacity to enforce the law seems to have the integrity or the determination to do so. This is impossible to accept.”

Sher committed herself to her court cases with exhaustive energy, becoming in the process an expert on 421-a rules and regulations, as well as the rent-stabilization law and code. She’s become so skillful at legal research and analysis that she earned her paralegal certificate from Pace University. She calls the 421-a law “simply byzantine without rhyme or reason.”

“It took me so long to unravel it,” she adds. “I became so adept at legal research and legal analysis I thought I’d like to continue doing this kind of work, though I must say that this case has been a rather dreary education in the court system, city and state administrative and regulatory agencies, and city politics.”

While there are gasps in the courtroom, and no lack of drama (the lawyers’ tempers flare up at each other often), there are also long stretches of tedium in Room 407. Many hours are spent by the tenants’ lawyer, Ed King, in getting all the rent registrations into evidence. There are no less than 16 different rents he needs to bring into evidence, to the frustration of the judge, the Two Trees lawyer, and all those observing in the courtroom.

Neither DHCR nor HPD, the agencies that are entrusted with protecting tenants and overseeing 421-a applications, have been able to provide a first lease for Goodman and Bromberg’s apartment. In fact, they claim they don’t keep those records. However, the law requires that landlords must keep copies of all leases during the tax abatement period. Two Trees lawyer Leon Behar claims that a record of the first lease, which had been in storage, was destroyed in a flood during Hurricane Sandy.

Just as in any good courtroom drama, a surprise star witness was introduced: the very first tenant who rented the Goodman and Bromberg’s apartment in 2005. The tenants were able to find David Rosen, who currently resides in New Jersey, and who had just returned from Dubai the day before a hearing in early November. Rosen willingly came to Housing Court in Brooklyn to testify one day.

But, to more gasps from the courtroom, Judge Finkelstein denied the witness the opportunity to testify because another witness was in the middle of his testimony. The next trial date has not been set, and may be scheduled for December, January, or February, at which time, the judge says, he will allow Rosen to testify.

The tenants say what they want is to stay in their apartments, to have alleged mold and water issues remediated, to have their rents adjusted to what they say are legal amounts, and to have their massive legal fees reimbursed. They also believe enforcement action against Two Trees is warranted.

Sher, especially, wants systemic change: investigations of why city and state agencies, “don’t adhere to their own rules and regulations and enforce the laws.”

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City Limits’ housing coverage is supported by the Charles H. Revson Foundation.