Court Shakes Up New York Landlords

By LINGLING WEI and DAWN WOTAPKA
New York's highest court ruled Thursday that owners of one of New York City's largest apartment complexes improperly raised rents on thousands of units removed from the city's rent-regulation program.
The Court of Appeals decision was another big setback to owners of the Peter Cooper Village and Stuyvesant Town complex on Manhattan's east side. It also sent shock waves through the city's real-estate industry on fears the ruling could open the door to hundreds of millions of dollars in rent rebates.
New York City's rental market is one of the world's largest and most lucrative. It is one of the few areas of the country where rents on tens of thousands of units are set by the government through laws -- put in place because of tight housing conditions -- that are praised by tenants and reviled by landlords.
A venture led by Tishman Speyer Properties and a unit of BlackRock Inc. bought the 11,200-unit complex in 2006 in a top-of-the-market deal valued at $5.4 billion. The Tishman venture, as well as the complex's former owner, MetLife Inc., took advantage of rules, known as luxury decontrol, that freed units from rent regulation when, for example, the combined income of its occupants exceeded $175,000 or when rents surpass $2,000 through capital improvements or cost-of-living increases.
But many of those units were also benefiting from a city tax break -- known as J-51 -- given to landlords as an incentive to upgrade properties. Shortly after the Tishman-led group bought the 80-acre complex, in one of the largest residential real-estate deals ever, a group of tenants sued MetLife and the new owners charging that state law prohibits apartments in the J-51 program from participating in luxury decontrol.
A lower court rejected the argument, but was reversed last spring by the Appellate Division of the State Supreme Court.
On Thursday, the Court of Appeals upheld the appellate court's decision. MetLife and the Tishman group's position "conflicts with the most natural reading of the statute's language," the court ruled.
Tishman called the decision an "unfortunate outcome" for the city. "The ruling, which reverses 15 years of government practice, raises a number of difficult issues that will need to be resolved by the courts and various government agencies in the coming months and years," the company said in a statement.
In a dissent to the Court of Appeals decision, Judge Susan Read warned of "significant, if not severe dislocations" in the city's real-estate industry. The ruling "has upended an understanding of the law upon which numerous and substantial business transactions and dealings have been predicated for over a decade," the dissent said.
Owners of tens of thousands of city apartments have increased rents in the same way the Tishman venture did. If their tenants pursue similar remedies, landlords may have to roll back rent increases, and may even have to pay back hundreds of millions of dollars collected in rent, say lawyers and real-estate industry executives.
"It's a terrible decision," said Steven Spinola, president of the Real Estate Board of New York. "This is another example of rent regulations basically throwing a little bit of havoc and a little bit of fear into property owners and financial institutions."
The financial consequences of the court's 4-2 ruling, which was cheered by tenants groups, are difficult to quantify because the court didn't address a number of issues, especially whether its interpretation of the law should be retroactive.
That issue will be addressed by a lower court. The tenants who filed the lawsuit against the Peter Cooper-Stuyvesant's owners are seeking $215 million in relief from rent overcharges, as well as attorneys' fees.
A lawyer for tenants' groups estimated that landlords of as many as 80,000 units have taken advantage of luxury decontrol and the J-51 tax program at the same time -- exposing them to similar lawsuits. Tenants of the London Terrace Gardens complex in Manhattan are talking to attorneys, said Andy Humm, president of the tenants' association. "If you want this tax break," he said, "you've got to abide by the rules."
The Peter Cooper Village and Stuyvesant Town complex has already have suffered an enormous decline in value since the 2006 deal. Deutsche Bank analysts estimate it is now worth $1.89 billion, down 65% from its sale price.