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Rent Stabilization Due Diligence for Multifamily Properties and Predictions for 2019

February 15, 2019

Last monthMichelle Itkowitz spoke on a panel at a meeting of WARE (Women Attorneys in Real Estate). The meeting was designed to discuss the challenges and opportunities for real estate practitioners in the coming year. Michelle spoke about "Rent Stabilization Due Diligence for Multifamily Properties".

Here is an interesting excerpt from her presentation:

I. INTRODUCTION – PREDICTIONS FOR 2019 FOR THE WOMEN ATTORNEYS IN REAL ESTATE

A. The Basis of My Predictions


The bulk of this publication is my booklet on Rent Stabilization Due Diligence for NYC Multifamily Buildings, which I just updated for the first time since I created it in 2015. I offer it to you for two reasons. First (and less importantly), it has some interesting legal sections regarding Rent Stabilization. Second, I want to explain the basis of my knowledge, on which I base my predictions for 2019.

When I first wrote this pamphlet in 2015, I was trying so hard to get clients to avail themselves of this Rent Stabilization Due Diligence (“RSDD”) service, which I was certain would be valuable to them. At first, no one understood what I was talking about, “Rent Stabilization Due Diligence? But I already have an engineer inspecting the building…?!” “Rent Stabilization Due Diligence? But seller will not give me copies of the leases…?!” Finally, clients started taking me up on the offer. Since then, I have done about 300 RSDD analysis, for purchasers (pre contract, during due diligence periods, and after closing), families transitioning buildings between generations, banks. I have rendered this service for 180 unit projects all the way down to two-unit buildings. What was once a hard-sell engagement, is now ubiquitous in my practice, and, indeed, in the industry. Recently, I am being called on by seller’s counsel, to evaluate the RSDD work of purchasers. 

My RSDD work has caused me to review the regulatory status of hundreds of apartments all over New York City – far more than I would normally encounter in my small (6 attorney) landlord and tenant litigation practice. Furthermore, in my litigation practice, I am frequently called upon to evaluate, and then defend or attack (remember I represent as many residential tenants as I do landlords), the regulatory status of apartments. Thus, I have, indeed, noticed trends in this area that are relevant to multifamily real estate.

B. My Predictions

I hate making predictions for a new year. Man predicts and G-d laughs. In any event, here’s what I got.

One in three (two-thirds of all) “free-market” apartments allegedly deregulated in the last ten years, were ILLEGALLY deregulated; they are still subject to Rent Stabilization and they are a source of tremendous liability for a multifamily building owner. When a tenant successfully overturns an illegal deregulation:

o The tenant cannot be evicted
o The rent rolls way back, and will increase very slowly
o There is typically overcharge liability, which 80% of the time gets trebled
o The decreased rent roll lessens the overall value of the building

In 2019, everyone (sellers, purchasers, and tenants) is going to be way more cognizant of these illegal deregulations; this is so because:

o Practitioners, such as me, increasingly focus on this area.
o Purchasers of multifamily have gotten so badly burned by this phenomena.
o Many tenants now have the right to free counsel in Housing Court; counsel is more likely to detect an illegal deregulation then a pro-se tenant.
o Life is getting harder all the time. When a tenant is having trouble paying the rent, she starts looking more deeply into her rights.

In 2019, this heightened awareness will lead to the following:

o More litigation whereby tenants seek to get a ruling that their free-market apartment is actually Rent Stabilized
o More purchasers demanding due diligence periods in sales contracts for multifamily assets, specifically for the purpose of confirming the regulatory status of the tenancies
o More purchasers pushing back on price on the basis of the vulnerability of deregulations
o Multifamily buildings will simply be worth less because of this trend

II. MULTIFAMILY BUILDINGS ARE NOT JUST BRICKS AND MORTAR; THEY ARE TENANCIES

The old saying goes that the three most important things about real estate are: location, location, and location. Keeping that rule in mind, one should add a rule about the three other most important things about multifamily real estate in New York City, and those things are: the tenancies, the tenancies, and the tenancies. A building's value is a function of the tenancies.

How do you know, before you buy a piece of multifamily real estate in New York City, that the tenancies are what the seller says they are? That the allegedly “free-market” units are really deregulated? That the Rent Stabilized unit’s rents are legal? That the tenant, whom, seller tells you will be easy to evict over non-primary residence, really can be? How, for that matter, can the seller be sure?  

EXAMPLE

Two gals in Brooklyn bought an eight-family building with only three Rent Stabilized apartments occupied. One of the occupied Rent Stabilized apartments was clearly not being used by the tenant as his primary residence. In fact, the tenant lived elsewhere and he was using the apartment solely as an office for his party-planning business.  

The new owners were excited to start a case against this tenant. But they could not! The tenant’s Rent Stabilized lease had long ago expired. You can ONLY do a non-primary residence case by first sending what is known as a “Golub Notice”, a special notice of non-renewal that can only be tendered between 150 and 90 days of the lease expiration. If there is NO LEASE, the lease can’t end. NO ENDING DATE means no Golub Period. NO GOLUB PERIOD means NO NON-PRIMARY RESIDENCE CASE. The only thing these new owners could do was to send this tenant, who was so clearly not living there, a new Rent Stabilized lease and wait two more years, until 90 to 150 days before the next lease expiration, to do a non-primary residence case!  

This would have been detected if these gals had run a proper Rent Stabilization Due Diligence Analysis. 

[END OF EXAMPLE]

Children have the same problem understanding their multifamily buildings when they inherit multifamily real estate from their parents. Banks have the same problems when lending on multifamily assets. 

Tenants have rent regulatory status problems too. How is a tenant to know if their free market tenancy is actually subject to Rent Stabilization? As with all my publications, this booklet has something for tenants as well – see below § Rent Stabilization Coverage Analysis for Tenants.

III. WHY IS IT SO HARD TO TELL IF AN APARTMENT IS SUBJECT TO RENT STABILIZATION?


There is no official list somewhere that definitively tells the world which apartments are subject to Rent Stabilization and which are not. The New York State Division of Housing and Community Renewal (“DHCR”) has jurisdiction over matters relating to Rent Stabilization and the DHCR maintains some records. But the records the DHCR maintains contain information that is largely self-reported by landlords and that is not controlling with regard to an apartment’s Rent Stabilization status. Therefore, year after year, a landlord can report to the DHCR that an apartment is “permanently exempt”, but that does not make it so.  

Moreover, a current or former tenant may have signed a document acknowledging that an apartment is not subject to Rent Stabilization. But this, also, does not make it so. Parties may not contract out of Rent Stabilization coverage. See RSC § 2520.13 (Waiver of benefit void); Drucker v. Mauro, 30 A.D.3d 37 (1st Dept 2006) (“It is well settled that the parties to a lease governing a rent-stabilized apartment cannot, by agreement, incorporate terms that compromise the integrity and enforcement of the Rent Stabilization Law.”) 

It is very important to keep in mind that a court or the DHCR can look back as far as they want to determine whether an apartment is subject to Rent Stabilization. While a rent overcharge claim is subject to a four-year look back period, a claim for improper destabilization is not. 72A Realty Associates v. Lucas, 28 Misc.3d 585 (N.Y.City Civ.Ct., 2010), Affirmed as Modified by 72A Realty Associates v. Lucas, 32 Misc.3d 47, (AT1st 2011), Affirmed as Modified by 72A Realty Associates v. Lucas, 101 A.D.3d 401, (1st Dept. 2012); Gersten v. 56 7th Avenue LLC, 88 AD3d 189 (1st Dept. 2013).

How do you ever get a definitive answer on an apartment’s Rent Stabilization status? With some exceptions, the last word on whether an apartment is Rent Stabilized is in the hands of the courts or the DHCR. Until a judge is satisfied that an apartment is not Rent Stabilized, the matter is always, in some measure, unsettled.  

Why is this so complicated? Because it is. There are many statutes and mountains of case law, stretching back to the 1970’s, that, when woven together, make up the rent regulatory scheme in New York City. Often enough the various courts and agencies do not agree with one another on vital topics and when the authorities do not agree, it takes years for their disputes to percolate up to the New York’s highest court for a definitive answer (think High Rent Vacancy Deregulation under J-51 or the Altman case - each took half a decade each to resolve). There are rules, and exceptions to the rules, and exceptions to the exceptions to the rules. And it’s getting harder all the time…

IX. RENT STABILIZATION COVERAGE ANALYSIS FOR TENANTS

I get multiple inquiries from tenants who want to know if they are Rent Stabilized. There are very few places for tenants to find accurate and actionable answers to their questions. I am such a place. Therefore, I created Rent Stabilization Coverage Analysis for Tenants.  It is the same high-level service I offer to landlords with my Rent Stabilization Due Diligence Analysis, but this is designed for tenants and delivered at a flat rate price.

If tenant is likely Rent Stabilized, she has different options for enforcing her rights. Some options are faster than others; some cost more than others; some are more aggressive than others. In general, tenant has the options of: going to DHCR; withholding rent, getting sued, and playing the situation out in Housing Court; suing for a declaratory judgment in Supreme Court; or doing nothing. In the Rent Stabilization Coverage Analysis I will cover separately the pros, cons, costs, time frames, and risks of each in detail.




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