Landlords Inflated Rents While Receiving 421a Tax Breaks, Lawsuits Allege

The owners of three buildings in Manhattan, Brooklyn and Queens are accused in the suits of falsely registering initial rents with the state Division of Homes and Community Renewal (HCR) in order to charge tenants more money than legally permitted at renewal or on new leases.

Tenants across three buildings in Brooklyn, Queens and Manhattan sued their landlords in state Supreme Court Wednesday, claiming the corporate owners have tried to “hoodwink” residents and a state oversight agency by illegally inflating rents in violation of the rules related to hefty 421a tax breaks.

The landlords—a series of limited liability companies (LLCs) tied to large real estate firms Atlas Capital Group, Heatherwood and Artimus Construction—are permitted to pay a fraction of their property tax bill by participating in the state’s 421a program, which mandates that recipients adhere to rent stabilization rules as a condition of the abatement. But all three falsely registered initial rents with the state Division of Homes and Community Renewal (HCR) in order to charge tenants more money than legally permitted at renewal or on new leases, the legal complaints allege.

The three class action lawsuits outline how, rather than register the lower rents they were actually charging tenants—so-called “preferential rents”—as mandated by 421a rules, the owners allegedly listed higher amounts and used those as the basis for future increases allowed by the city’s Rent Guidelines Board (RGB). The board sets annual percentage increases that owners of more than 1 million rent regulated apartments in New York City must follow.

“It’s shameful,” said attorney Lucas Ferrara, a partner in the law firm Newman Ferrara and a professor at New York Law School, who is representing the tenants. “They’re manufacturing these silly loopholes and workarounds to sidestep the very purpose of the law, which was to increase the availability of affordable housing.”

Ferrara’s colleague Roger Sachar said owners “taking millions in tax benefits while not following rent regulation” is rampant across New York City. But with HCR facing staff shortages and lengthy complaint backlogs, it’s rarely enforced.

City Limits reached out to the corporations tied to the buildings’ LLC owners as well as attorneys who have represented the owners in past cases, but none have provided a response to phone calls and emails by press time. This story will be updated should they respond.

The 421a program, which expired in June, was estimated to cost New York more than $1.7 billion a year in potential property taxes, but supporters of the abatement strategy, including Gov. Kathy Hochul, say it is imperative for incentivizing middle-income housing production. From 2010 to 2020, about 70 percent of new apartments in buildings with four or more units were built with 421a abatements, according to a February report by the Furman Center. 

But the program is ripe for potential rent fraud, said Ferrara and Sachar, because increases over the 30-year duration of the tax break are based on the initial monthly cost. That gives owners, like the corporations behind the three LLCs, a perverse incentive to fudge the numbers to appear higher than the amount they actually charge tenants, Ferrara said—so at the next lease renewal, they can jack up the price higher than they otherwise could if they had registered an accurate, but lower, initial rent.

Each class action lawsuit accuses the owners of inflating rents on at least 100 current and former tenants. In one apartment at a 142-unit high-rise on 27-03 42nd Rd. in Long Island City, the owner—listed as 1719 27th Street LLC—registered an initial rent of $3,794 per month with HCR but charged the tenant a preferential rent of $3,477, claiming the lower cost was based on a one-month concession, the complaint states.

Under 421a rules, however, the initial amount registered with the state must be the “monthly rent charged and paid by the tenant” even if it is a preferential rent. The lawsuit charges the owner with attempting to obscure what amounts to a preferential rent by claiming the lower monthly cost was the result of a one-month concession averaged across the full year.

“That ‘rent concession’ is a ‘preferential rent’ by another name,” the lawsuit states. The building’s LLC owner is tied to the large real estate firm Heatherwood, which did not respond to a phone call or email seeking comment.

At another 443-unit building at 54 Noll St. in Brooklyn, property owner ACI VI Denizen LLC raised rents for new tenants based on amounts falsely registered with the state rather than the actual total paid by the previous tenant, according to the complaint. Those increases would violate the 421a and rent stabilization rules that permit only modest percentage increases.

“Because subsequent rent increases were based upon an incorrect initial legal regulated rent, the entire rent history is tainted,” the lawsuit claims.

The suit also accuses the owner of illegally raising rents on an existing tenant. In one example, the landlord registered the monthly amount at $2,385.25 per month but charged the tenant a “preferential rent” of $1,762.50. At lease renewal in 2021, the owner then raised the rent to the registered amount, leading to what amounted to a 35 percent increase in violation of tenant protection laws, the complaint states. That year, the RGB permitted only a 1.5 percent hike which should have been added to the preferential rent, according to the lawsuit. 

Atlas Capital Group purchased the building at 54 Noll St. from the original owner All Year in 2021 and established the LLC listed as owner, but did not respond to a phone call seeking comment. 

At a 204-unit building at 260 West 26th St. in Chelsea, the owners also based renewal increases on the registered rents to hike prices above the legally allowed percentage, according to the lawsuit. The owner, listed as Chelsea W26 LLC, rented out one apartment at $2,260.87 in 2020 but registered the rent at $3,000 with the state.

At the first lease renewal in 2021, the owner raised the rent to $2,595 per month—less than the registered amount but far more than the 1.5 percent increase allowed under state laws based on the preferential rent, the lawsuit states. At the second renewal earlier this year, the owner eliminated the preferential rent and raised the cost to the registered monthly total, now $3,097—37 percent higher than the first lease amount, the complaint continues. 

The building is owned by Manhattan-based Artimus Construction, which did not respond to an email and phone call seeking comment Wednesday. 

The class action lawsuits were each filed by tenants following an investigation by the housing watchdog group Housing Rights Initiative (HRI), which frequently targets owners accused of 421a fraud. HRI Founder and Executive Director Aaron Carr urged HCR and other state agencies to take a harder line on 421a fraud to deter owners and developers from reaping tax break rewards while failing to uphold the rent laws. 

“The 421-a program costs taxpayers $1.7 billion a year, which is larger than the entire budget of the City of Denver,” Carr said. “The fact that the New York State government continues to defer its tax enforcement obligations to an organization that has a fraction of a fraction of a fraction of their budget is not just an unmitigated tragedy, it is a full blown scandal.”

HCR declined to comment on pending litigation.