Landlord Wrongly Raised Rents

NEW YORK, NY - Tenants at Stuyvesant Town and Peter Cooper Village, the sprawling middle-class apartment complexes on the East Side of Manhattan, won a major victory over their landlord on Thursday when an appeals court ruled that the company had wrongfully raised rents and deregulated thousands of apartments after receiving special tax breaks.

The decision, issued by the Appellate Division of State Supreme Court in Manhattan, could ultimately cost the landlord, Tishman Speyer Properties, $200 million if it is required to repay residents of more than 3,000 apartments for improper rent increases over the past four years, said a lawyer for the tenants.

Landlords say the decision could also affect hundreds of other apartment house owners who, like Tishman Speyer, obtained tax breaks under the city's J-51 tax program for property renovations and then raised rents beyond certain set levels. The Appellate Division ruled that apartments must remain rent-regulated as long as the building owners enjoy J-51 tax benefits.

After watching many rent regulations wither away over the last two decades, tenant advocates were thrilled with a decision in their favor. "It's a good thing for the tenants and for affordable housing," said Alvin Doyle, president of the Stuyvesant Town-Peter Cooper Village Tenants Association.

Alexander H. Schmidt, a partner at Wolf Haldenstein Adler Freeman & Herz who represented the tenants, added: "It's a very important victory not only for our clients but for tenants citywide. These building owners understood, or should have, that they were taking a risk. They were relying on an interpretation of the law that contradicted the plain meaning and words in the statute."

Tishman Speyer, which bought the two complexes in late 2006 with BlackRock Realty for a record $5.4 billion, issued a statement Thursday evening saying that it would "continue to pursue all potential appeals and defenses."

The prospects are not bright. The company must ask the Appellate Division or the State Court of Appeals, the state's highest court, for permission to take the case to the Court of Appeals. If not, it has few other remedies.

Tishman Speyer's business plan for Stuyvesant Town and Peter Cooper Village presumed that they could increase profits by replacing rent-stabilized residents with much-higher-paying tenants after renovating and deregulating the apartments. Under state law, an apartment can be deregulated after it becomes vacant and is renovated, or if the rent reaches $2,000 a month. State law restricts rent increases for regulated apartments but not for deregulated ones.

Over the last year, Tishman Speyer has come under financial pressure from lenders and bondholders. There is a wide gap between the rental income at the properties and the monthly loan payments, and the company has been unable to convert apartments to market rates as quickly as it had projected.

Tenants at Stuyvesant Town filed the lawsuit in 2007, arguing that Tishman Speyer and the previous owner, Metropolitan Life, were prohibited from removing apartments from rent regulation and imposing large rent increases because the complexes had received $24.5 million in tax breaks since 1992 under the J-51 program. The state and the city had allowed landlords to deregulate more than 3,000 of the 11,200 apartments in the complexes.

A popular program with landlords, J-51 was intended to encourage owners to refurbish their properties and make capital improvements. The Appellate Division ruling overturned a lower court decision that had favored landlords.

"It is time for the owners of Stuyvesant Town and Peter Cooper Village to sit down with residents of the complex to resolve this dispute over rent overcharges in a fair and equitable manner," said the Manhattan borough president, Scott M. Stringer, who had filed a brief in the case on behalf of the tenants.

But Joseph Strasburg, president of the Rent Stabilization Association, which lobbies on behalf of landlords, said the decision could have a devastating impact on many landlords in all parts of the city who had relied on the state housing agency's interpretation of the law regarding J-51 tax breaks. Landlords may have to give back thousands of dollars in rent, which in turn, could lead to lower building values and a drop in tax revenues for the city.

"They've basically re-regulated tens of thousands of apartments overnight," Mr. Strasburg said. "Every single tenant living in a decontrolled apartment can file for overcharges. What's the incentive for landlords to do these kind of major renovations if at the end of the day the apartments will continue to be regulated?"