Why Overriding the Roberts Decision Would Be Wrong

The real-estate lobby is pushing for legislation that would gut the J-51 program, turning it into a great big giveaway where landlords get more than $1 billion a year in tax breaks and the city gets none of the improved affordable housing the program is meant to pay for.

On May 4, the state Senate Housing Committee approved S 4117 A, a bill that would let landlords who get J-51 tax breaks deregulate apartments if they leave the program and pay back the benefits they received. The bill, heavily supported by the real-estate lobby, would overturn the Court of Appeals’ 2009 decision in Roberts v. Tishman Speyer Properties, which held that it was illegal for owners to deregulate apartments in buildings that receive J-51 benefits.

Though the bill has little chance of passing the Assembly, there is a strong chance that its provisions could resurface as part of a “compromise” on renewing the rent laws.

The bill’s sponsors say it would provide landlords with “relief” from unexpected consequences arising from the Roberts decision—that is, having to lower rents and reimburse tenants and pay penalties for illegal overcharges in the about 40,000 apartments known to have been illegally deregulated. In actual fact, it would expose as many as 500,000 apartments to deregulation, two-thirds of the 750,000 that receive J-51 benefits.

This is because the Roberts decision affected only buildings that would have had rent-regulated apartments even if they never received J-51 benefits. The Senate bill also contemplates the deregulation of apartments that became or will become stabilized only because of the receipt of J-51 benefits.

This would be both morally wrong and disastrous for the city’s housing supply. Landlords have often argued that rent regulations make it harder for them to afford to improve their buildings. The J-51 program, established in 1955 when many apartments still had toilets in the hall and only cold water, was the city’s response. It gave owners tax breaks for making improvements. In exchange, they were required to keep the apartments affordable, under regulation. A fair deal? The Court of Appeals thought so.

Overturning the Roberts decision would reward lawbreaking and encourage landlords to engage in ever riskier and ever less justifiable evasions of the rent regulatory laws. It would encourage the public to view the rent laws as having less force than other laws. It would create uncertainty about whether landlords would be able to escape other clear obligations imposed by current law. It would deprive the public of the rent-regulated housing that has been the quid pro quo for receipt of J-51 benefits since the 1950s, and it threatens the immediate deregulation of hundreds of thousands of housing units, rendering them permanently unaffordable to ordinary New Yorkers.

Ever since its enactment, the J-51 program’s core purpose has been the use of public subsidies to fund improvements to regulated apartments, in exchange for a commitment that such apartments remain affordable. According to the 1955 Legislative Annual, its purpose was:

“[A]s new housing is not being produced at a fast enough pace to provide decent, safe and sanitary homes for lower income families, some provisions must be made to encourage owners to alter and improve salvageable buildings.”
From the earliest days of the program, owners who sought to use J-51 benefits to fund work that would result in deregulation were held to be ineligible for benefits. It has had the same basic purpose: “to increase the supply of moderate rental housing with satisfactory standards,” as a 1979 court decision held.

For this reason, the J-51 Ordinance contains numerous rules that are designed, with varying degrees of success, to eliminate the incentive for owners to use J-51 benefits for luxury housing: for example, the limitation on the amount of the total assessed valuation of the building that will receive an exemption, and the geographic limitations that apply special requirements to certain areas in Manhattan such as a “minimum tax zone” and a “tax abatement exclusion zone.”

The principal means by which the J-51 program has prevented the use of public funds to subsidize unregulated luxury housing, and the displacement that goes with it, has been the mandate that every single apartment in a building receiving J-51 assistance remain rent regulated at least throughout the tax benefit period. If the tenants are not notified that the building is getting J-51 benefits, their apartments must remain regulated as long as they live there.

These laws and regulations were on the books before 1993, when “luxury” deregulation began, and they remain on the books today. They were the law throughout the time when landlords were heedlessly deregulating apartments in J-51 assisted buildings. They include the Rent Stabilization Law, which required at the time and still requires that all of the “dwelling units in a building or structure receiving benefits” be made rent stabilized; the city administrative code, which required and still requires that “the benefits of this section shall not apply… to any existing dwelling [defined as ‘a class A multiple dwelling or a building’] which is not subject to the provisions of the… city rent stabilization law;” and HPD’s regulations, which required and still require that “for at least so long as a building is receiving the benefits of the Act… all dwelling units in buildings or structures converted, altered or improved shall be subject to rent regulation pursuant to: …the Rent Stabilization Law of 1969.”

The public has spent billions of dollars on the J-51 program. According to the “Annual Report on Tax Expenditures” prepared by the New York City Department of Finance for fiscal year 2011, “the J-51 program provided 20,758 exemptions and 151,957 abatements to approximately 750,000 apartments.” The exempt assessed value of these properties was $1.208 billion.” In fiscal year 2010, it provided 19,981 exemptions and 141,890 abatements to 724,971 apartments, with an exempt value of $1.193 billion. In fiscal year 2009, there were 15,093 exemptions and 137,386 abatements to 723,811 apartments, with as exempt value of $1.157 billion.” Similar numbers have been reported for prior years.

The Senate bill, as amended, would permit the owner of every apartment that is now rent regulated because of the J-51 program to waive J-51 benefits and thereby deregulate the apartment. These apartments are not just the unlawfully deregulated apartments in otherwise-rent-stabilized buildings that were at issue in Roberts. They include apartments in buildings that only became rent regulated because of the receipt of tax benefits (such as those built after January 1, 1974), and the hundreds of thousands of not-yet-deregulated apartments in buildings such as Stuyvesant Town that the Roberts decision protected from deregulation, but where landlords are not yet liable for overcharges.

It is impossible to overstate the magnitude of the unearned windfall that would be given to landlords under this bill. In buildings that are regulated solely because of J-51 benefits, any tenant who succeeds in challenging an illegal rent would find the rules change on the landlord’s mere say-so, simply by means of the repayment of J-51 benefits. There would no longer be any meaningful consequence if the landlord refuses to register the rents, refuses to notify the tenants of the receipt of benefits, refuses to provide renewal leases, or refuses to make repairs. No matter what the landlord might have done, and no mater what he or she might have been found guilty of doing, all he or she would have to do is write a check, and the tenants’ rights would instantly disappear.

This windfall goes far beyond limiting landlords’ potential liability for overcharges under Roberts. By holding that apartments in J-51 assisted buildings cannot be deregulated, the decision extended a shield of protection around hundreds of thousands of working-class tenants who now pay affordable rents and who would otherwise be targeted for harassment, threats, and baseless eviction proceedings. It took away a significant part of the incentive for owners to resort to illegal tactics to obtain vacancies. The elimination of that incentive did not, by itself, cost any landlord any money. Nevertheless, the bill’s sponsors now wish to paint a fresh target on the backs of these tenants.

The stated rationale of the bill does not apply to these categories of housing. No one can seriously argue that the owners of buildings and developments such as Independence Plaza North, that are regulated only because of the receipt of J-51 benefits, had any expectation under existing law that they would be exempt from rent regulation. Perhaps that is the reason why Laurence Gluck, the owner of IPN, kept that the development was receiving J-51 benefits a secret from the tenants and from regulatory authorities for years. When confronted with the fact that it had been, he acted exactly as you would expect someone to act when caught red-handed. He attempted to cover up the receipt of benefits, arranging in private meetings with city officials to waive them, while falsely telling the tenants and the courts that he never got them. He knew, as every landlord receiving benefits should know, that the quid pro quo is rent regulation.

The bill is also an insult to the American ideal of the rule of law. The Roberts case was decided one and a half years ago, and, notwithstanding the predictions of the real-estate industry, the world has not come to an end. The same landlords who have asked the legislature to relieve them from overcharge liabilities have claimed, in pending court proceedings, that they have no liability to worry about. They have come to court armed with all of the protection they might reasonably want, since the law already places enormous obstacles in the path of tenants seeking to recover overcharges. If there were any truth to their claims of having relied on state Division of Housing and Community Renewal regulations as a basis for deregulation, they would be able to avoid having to pay treble damages. As numerous owners have pointed out in their court filings, they are presumptively entitled to charge rents based on the inflated and often illegally deregulated rents they were charging four years before they were sued. This presumption is overcome only when there has been a showing of fraud. Surely the legislature does not wish to give its imprimatur to fraud.

The rationale for the bill is based upon a myth. It was never legal to deregulate apartments in J-51 assisted buildings. As noted above, the pre-1993 law that required that “all” apartments in J-51 assisted buildings remain regulated was never changed. As the Court of Appeals said in Roberts, the plain meaning of the statutory language indicates that J-51 assisted apartments are exempt from deregulation, an obvious conclusion when the deregulation statute is read together with the laws and regulations governing the J-51 program. DHCR’s initial reaction to the 1993 deregulation statute was to hold that all assisted apartments were required to remain regulated.

The sponsors’ contention that landlords were relying on binding DHCR rulings when they began deregulating apartments in J-51 buildings is also a myth. The sponsors admit that “the deregulation of those apartments occurred since 1993.” It was not until 1996 that DHCR issued a private, nonbinding opinion letter approving of the deregulation of any J-51 assisted units, and there is no evidence that anyone but a few insiders knew about it. It was not until December 2000 that DHCR adopted regulations that would explicitly permit deregulation in J-51 assisted buildings, and they were described at the time as a change in the law. After their adoption there were still two contradictory sets of regulations on the books, those of the city Department of Housing Preservation and Development (requiring that “all” apartments remain regulated) and those of DHCR.
In the face of what was still an uncertain legal picture, owners plunged heedlessly into deregulation, without ever seeking a court ruling on the issue. As the sponsors admit, they began deregulating apartments before there was ever any legal authority supporting it.

Now the owners who took that risk are seeking a legislative bailout. Their request should be denied. If they get a bailout they will expect, based on experience, to be relieved of the consequences of ever more risky challenges to the obligations imposed by the rent laws. They should not be rewarded for having disregarded their clear legal obligations.