Sunday, October 25, 2009

A Quick Guide from NYC on How to Torture Landlords

New York state's highest court has just bitch slapped a bunch of landlords who think they can provide apartments for the people of NYC at a rate that reflects the market rate.

These landlords have forgotten that NYC rents are determined by a bureaucracy that would probably make terrorists talk quicker than waterboarding does. Yes, if you want to make terrorists talk, give them each a multi-unit Manhattan housing complex to run.

The latest evidence that landlord torture exists in NYC comes from the state's highest court that ruled the owners of Stuyvesant Town and Peter Cooper Village, both in NYC, illegally raised rents while collecting tax rebates, known as J-51 payments.

According to the NYC Department of Finance, in the year ending June 30, the J-51 program provided 15,093 exemptions and 137,386 abatements to 723,811 apartments.

What does this mean? NyPo says:
A huge chunk of the city's rental-apartment industry is in chaos this weekend as owners and tenants grope with the Court of Appeals ruling that luxury rent increases at Stuyvesant Town were illegal....As renters and owners alike burned up the phone going to belines with their lawyers, questions swirled concerning:

* What rents tenants would be charged on Nov. 1. Would landlords collect the higher market-rate rents and put some in escrow or charge a lower rent with some modification to come?

* Whether each tenant affected by the court ruling -- perhaps as many as 10,000 -- has to file their own rent refund application.

* How the State's Division of Housing and Community Renewal would deal with the expected application deluge.

* If each rent-refund application, with its unique time period and refund amount, would be fought for years in court by landlords

* How much City Hall stood to lose in tax collections, which are based, in part, on the profits of building owners.

As far as how much rent to collect, some lawyers are advising owners to collect the full amount and place possibly disputed amounts into escrow.

"The most conservative is to say maybe you collect the fair market rent and it's subject to further determination," said Joseph Strasburg, President of the RSA. "Whatever you are collecting you can't spend."
Which, of course, raises these further questions: How can a landlord possibly make repairs to his building, when he has no clue what his ultimate revenue stream is? Who in their right mind would invest in an NYC apartment complex, unless it is done at a huge discount?

The legal fees alone for landlords to battle tenants will be astronomical. NyPo again:
Lawyers say each tenant's situation will be different, and that each tenant may have to file an individual application with DHCR to receive possible rent breaks. They also agree that the woefully understaffed agency is not going to be equipped to handle hundreds, let alone thousands, of overcharge complaints.

Additionally, since it was this agency that gave the green light to owners 15 years ago, any decision it renders could be subject to further litigation.
Only such a nutty legal terrain would create battles between tenants and landlords, where they aren't allowed to reach agreement between themselves over rent, but must, instead, mud wrestle in front of a rent panel.

But before even the battles begins, complete confusion must reign for a bit longer:

The case itself affects just over 4,000 units at Stuy Town and Peter Cooper Village, where over $215 million is expected in refunds, but is now headed back to State Supreme Court for further clarification and litigation.

Issues yet to be decided, as directed by the court last week, include "retroactivity, class certification, the statute of limitations and other defenses that may be applicable to particular tenants."

Currently, overcharge complaints can only be reviewed for four years from the date of the tenant's DHCR application. Tenant lawyers may argue that the retroactivity should extend back for the entire 15 years since the state agency said buildings getting the tax abatement could also qualify for luxury deregulation...

Banks holding mortgages on the buildings will also have to figure out what to do. "They have lent based on a rent roll and now the loan may be out of proportion to the building's value," explained Turkel.

Already, the reserve fund set up by the owners of Stuy Town is running low and is expected to run out by January. The new ruling could force them to hand over the keys to lenders even sooner...

Both sides as well as the Court have said the state legislature could fix all the problems with new legislation. But there is nary an elected official that would dare now to come to the rescue of the real estate industry -- even if it sends rental buildings into foreclosure and abandonment.
Yes, torture landlords. That's a great way to get them to increase the housing stock. And make confusion reign, so that a landlord faces the risk of major loss if he attempts to do repairs before he actually knows what amount of funds he ultimately will have at his disposal.

The resulting poor upkeep of buildings will, of course, be blamed on the landlords and probably result in even more regulation.

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