Our friend, Joshua Stein , asked real-estate attorneys what they thought of the Court of Appeals's decision in Roberts v Tishman Speyer Props., L.P. .
Here are the responses he's collected thus far:
*** COMMENT 1 ****
The core statement by the Court in interpreting the statute..."Contrary to PCV/ST's and MetLife's argument, there is nothing impossible, or even strained, about reading the verb 'become' to refer to achieving for a second time, a status already achieved."...is just plain wrong.
*** COMMENT 2 *****
I'm glad you mentioned the TOUSA decision as we absorb the Stuy Town case because I was struck by how similar the opinions are (despite different jurisdictions and totally different subject matter). Both cases seem to reflect an almost populist perspective in ruling against the Wall Street money in favor of their "victims". [One could add some other cases to the list of such cases. - Ed.] I may be reading too much into them, but it was as if the courts were punishing the financial institutions for doing deals that the courts believe should probably never have been done, and which could only have closed during the bubble. Both cases rely on strained logic, at best, to reach decisions that seem result driven against the "bad guys" who created this mess. The TOUSA opinion in particular is surprisingly inflammatory and includes personal and insulting characterizations of the bankers who completed the deal. Both decisions appeared to me to have been result driven against the boogie men who exploited the bubble to generate fees (in TOUSA) or to unfairly raise rents (in Stuy Town). Could this be a trend?
*** COMMENT 3 ****
One interesting comment I heard is that the politicians who have been supporting the pro-tenant position may not realize the impact of decision on apartment valuations, which will (or should) reduce property tax assessed values.
**** COMMENT 4*****
How about some nuts and bolts of what the decision means: I know it means that can't luxury de-stabilize. But, to ask dumb questions:
- Are those tenants afforded all stabilization rights, including right to one or two year renewals and increases limited to stabilization increases, too?
2. If an apartment was de-stabilized, does it then become re-stabilized if building later gets tax benefits?
3. If a co-op or condominium gets tax benefits, is there now an argument that subtenants in a co-op or renters in a condominium become stabilized? (Previously thought that such properties were explicitly excepted from regulation.)
*** COMMENT 5 ****
I wonder if the owners of Stuy Town have the ability to retroactively say "no, thank you," to J-51 benefits. After all, those benefits were apparently worth about $25 million and have now cost at least $200 million in lost rent increases. Over the next ten years, there will probably be benefits and losses in like amounts. This means the total "loss" by accepting J-51 benefits was at least half a billion dollars. Can the owners change their mind about J-51 and pay back the benefits received? I don't know.
**** COMMENT 6 ******
I have several, slightly disconnected thoughts:
1. I was surprised at the "self-assurance" in the tone of the decision. Something must have strongly persuaded the 4 judges in the majority that the correct interpretation of the statutory language was not as DHCR has construed it (or as any normal native English-speaker who would have read it). I don't think that one can know exactly what happened without having been at the oral argument, or at least having read the briefs.
2. And speaking of the briefs, I noticed that The Legal Aid Society filed an amicus brief, I assume on the side of the plaintiffs. Virtually every major law firm in NY supports Legal Aid. I'd like to know why Legal Aid felt it had to weigh in. To my mind, for a public service agency to take the tenants' side in this case is wrong-headed. The result damages New York. Legal Aid should have remained silent.
3. To me, the argument on the side of the plaintiffs that seems to have some appeal (no pun) is the argument that the legislature never intended there to be two classes of rent-stabilized buildings with J-51 benefits (although that seems to be what everyone believed, including DHCR), one group that was already rent-stabilized and therefore would not lose vacancy-decontrol benefits when receiving J-51 subsidies, and the other group (really the gut rehab properties) that became rent-stabilized because the owners received J-51 benefits and could not take advantage of vacancy decontrol. That structure does in fact make sense when you realize that the starting rents in gut rehab buildings are market rents; we don't know why that point was not brought out more strongly to the court.
4. You have to give the tenants' attorney credit for good lawyering here. He was able to persuade the court that the DHCR regs were clearly wrong, when most people would have logically inferred the word "solely" from the statutory language itself and not questioned the regs.
5. The best we can now hope for at the judicial level is that lower courts will apply this decision only prospectively - the court distinctly left open that possibility.
6. The real estate industry must do a massive lobbying effort in Albany to fix the mess. The odds are against us, but we have to try. The court clearly said that the matter should be addressed by the legislature.
*** COMMENT 7 *****
The Per Curiam decision is a struggle to get through because neither the statute nor the administrative applications over the years easily suit the opinion. However, if you accept the policy underlying the statute -namely that a landlord should not be able to get substantially reduced real estate taxes and then charge market rents--the result announced in the Per Curiam is easily understood and correct.
Landlords will undoubtedly turn to the dysfunctional gangs in Albany who call themselves legislators for relief, but the political environment will probably not be very warm to enacting legislation limiting the Roberts decision to prospective effect. Perhaps the gangs can eliminate the treble damages or give landlords time to make restitution or provide a short time period for claims to be made.
*** COMMENT 8 *****
I reviewed the decision. I believe the statutory language was ambiguous and the court could have decided either way as a matter of statutory construction. However, I believe the court was probably correct from a policy standpoint. The quid pro quo for tax abatements is regulation of rents during the abatement period. When MetLife convinced DHCR to change "by virute of" to "solely by virtue of" in DHCR's regulations they may have done themselves and Tishman Speyer a disservice, as it highlighted the fact that the language was ambiguous (DHCR would not have had to add the word "solely" if the language were unambiguous). This gave the court an opening.
**** COMMENT 9 *****
Rent control in this state has been part of a crass, political calculation since 1943: there are more tenants who vote than landlords.
There has been no logic or coherence to the program which had only a bare minimum of justification after 1950.
That fact is yet another reflection, if one were needed of the ineptitude of the New York political process and structure; we have as much voter control as do the people of China who routinely elect a congress.
Up until now, the Court of Appeals had been some refuge for rationality or fairness in the area. With this decision, that is apparently lost and the administrative agency which is supposed to monitor the program is simply tossed aside to conform to political motivations. It is very disappointing.
I have no suggestions as to what "the industry" can do since the industry has been calling attention to the unforseen and unwanted ramifications of rent control for almost fifty years, with no success.
Sorry to sound like an old curmudgeon, but on this subject, that is what I am.
*** COMMENT 10 ****
In my fantasy alternative universe, I wonder if this case will provoke such a backlash that New York just might see how idiotic the entire rent control/stabilization scheme is, and finally get rid of it. My sense is that there is quite significant (but largely hidden) rental vacancy rate in Manhattan right now so maybe we are approaching an opportune time to finally fix (and simplify) the rental market and landlord-tenant relations by removing the city's absurd rent regulations. It is beyond me why any reasonable court would even deem this whole scheme constitutional. As a very simple fix, I would simply legislate that landlords may increase rents by 15% a year, with a total sunset after five years. This would solve the problem fairly quickly and simply, and in short order restore a functioning marketplace. We would then get government out of the business of bestowing random windfalls on people.
*** COMMENT 11 ****
Hubris and greed for all involved. The owners, the banks, the lawyers, everyone. Even the tenants (though they prevailed).
At the time of the Stuy Town acquisition, most market participants and observers watched in shock and awe, strongly suspecting that this deal didn't make sense (or cents). The aggressive market assumptions, aggressive financing, and aggressive lawyering. A very aggressive and risky business plan contingent on aggressive assumptions for rent increases, market conditions, financing, etc.
I don't know exactly who advised Tishman Speyer, Black Rock, and Metlife on rent deregulation issues, but surely they were familiar with the J-51 deregulation complications and potential issue.
The tenants themselves are left with a potential Pyrrhic victory.
Those who were illegally deregulated will now receive credit against future rent, which means a decrease in income for the property owners. With imminent default, maintenance reserves have been drawn down. This means a future of deferred maintenance and service cuts for tenants. These same tenants never asked for the property improvements that were financed with this acquisition (improvements that give the owners justification for rent increases and deregulation to re-position the property as "luxury" while it always was - and really should have remained -- solidly mid-market).
The new windows that tenants received will now look out on courtyards increasingly filled with signs of deferred maintenance. So the tenants won't have to pay more, but they will still be losing out. This is boom/bust mentality, a big change from the previous "steady as she goes" management of these properties.
There is a reason that this acquisition is always mentioned in the same breath as being "top of the market" (among a couple of notorious companions). Everyone flew too close to the sun, and the Court of Appeals just melted the last wax from their wings.
**** COMMENT 12 ****
Are there any further avenues of appeal available for this result? It's hard to see how you would get the case into federal court, but I'd be curious if anyone has any suggestions. If the Stuy Town owners were to file bankruptcy, might the bankruptcy court be able to "do something"? We have learned from Tousa and other cases that the bankruptcy courts don't hesitate to do what they think needs to be done to get to the right place.
**** CAVEAT ****
These are anonymous comments. Don't assume any of the commenters is objective or unbiased or has full information. Some of the commenters may have a personal interest in the outcome of this case or may have represented one of the parties. I realize this is a silly and obvious caveat, but we live in an era of silly and obvious caveats.