Housing

Cuomo Lets Scofflaw Landlords Make Good — by Raising Rents

Under ‘scheme swapping,’ NYC building owners keep raking in tax benefits without lowering prices

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Mark Scharfman may not be the most infamous of New York landlords — at least not on the scale of a Croman, Walentas, or Kushner — but he’s still managed to attract a bit of notoriety in his decades-long real estate career. The owner of an estimated 4,000 apartments in the city through his Scharfman Organization, Beach Lane Management, and other holding companies, Scharfman has earned headlines for bringing the Gap to St. Marks Place and doubling the rent on the Cornelia Street Café. He landed a spot on the New York Press’s “50 Most Loathsome New Yorkers” in 2003 for his “Dickensian tales of tenant abuse.” In 2016, tenants at one of his Bronx buildings called Scharfman a “criminal” after he was charged with falsifying renovation documents to claim that the 125-unit building was vacant.

In that same year, Scharfman was one of numerous New York City landlords who received a letter from Gov. Andrew Cuomo informing him that he had illegally deregulated apartments that were required to be kept rent-regulated as a condition of getting city tax breaks — a measure that Cuomo said would end up re-regulating 50,000 apartments citywide. “There will be zero tolerance for those who disregard the law and reap these benefits while denying tenants affordable housing they are obligated to provide,” the governor said at the time.

Scharfman did indeed re-regulate more than 400 of his apartments, tenant advocates say — but this didn’t mean anyone’s rents went down. Instead, they say, Scharfman and other landlords used a scam they have dubbed “scheme swapping” to keep rents high while still raking in city tax breaks. And the Cuomo administration, they charge, has done little to crack down on the practice.

The Scharfman Organization, according to Aaron Carr of Housing Rights Initiative, is “one of the biggest, if not the biggest, J-51 tax cheats in New York City.” HRI, which has filed more than thirty class-action suits against owners over J-51 violations, estimates that Scharfman has received at least $10 million and probably more than $20 million in J-51 benefits over the past ten to twenty years.

“Scheme swapping is real estate fraud 2.0,” says Carr. It provides a way for landlords to keep rents high while the state can still claim credit for returning apartments to the rent-regulation rolls, he explains. “Our affordable housing stock is descending into a sinkhole, and all the governor wants to do is decorate it with Christmas lights.”

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The city’s J-51 tax abatement program was created in the 1950s to help property owners improve rent-controlled buildings, such as by installing hot water in “cold-water flats.” In exchange, landlords agree to keep the buildings rent-regulated for the duration of the tax break, which can last between fourteen and 34 years.

For more than two decades, though — starting with the 1994 vacancy decontrol law that allowed landlords to deregulate vacant apartments if the rent was high enough — owners regularly removed apartments getting J-51 abatements from the rent-regulation rolls, and the state did little to check up on them. Even as Cuomo and then-attorney general Eric Schneiderman announced a crackdown on illegally high rents, noted ProPublica in 2015, “state and New York City officials have tolerated the problem for years — and ignored pleas to investigate.”

That article helped spur Cuomo’s 2016 enforcement effort. But instead, according to Carr, many landlords simply swapped in a new scheme for keeping rents high: If they had to re-regulate apartments, they would — but at the high rents they’d set while the buildings were illegally deregulated, not what the rents should have been if they’d followed the law.

Here’s how the scam works, according to some of the scores of rent histories HRI has helped tenants obtain from the state. At 709 West 176th Street, a six-story 1920s-vintage brick apartment building in Washington Heights, one Scharfman tenant’s apartment was registered with the state at a rent of $872 a month in 2010, then not registered at all from 2011 to 2015. After Cuomo’s letter, the landlord re-registered it in June 2016, setting the legal rent at $2,895 — though the tenant was charged a discounted “preferential rent” of $2,450, which can be raised to the legal maximum once the lease expires.

(The Scharfman Organization did not respond to phone messages left at its Westchester County office number.)

HRI has identified more than 1,000 buildings that had received J-51 benefits which had unregistered apartments in 2016. In more than 95 percent of cases where landlords later re-established them as rent-stabilized, Carr says, they scheme-swapped — re-registering the apartments at the illegally deregulated rent levels. The result, he adds, is that those apartments are now “rent-stabilized in name only.”

The method by which landlords are supposed to set re-regulated rents is complicated: For buildings that already had some legally deregulated apartments when they started receiving J-51 benefits, the rent in those units can be raised above the last previously registered amount by adding vacancy bonuses, increases for apartment renovations, and other legal charges.

But one thing is for certain: The state Division of Housing and Community Renewal flatly states in its J-51 FAQ that “the legal regulated rent to be registered cannot exceed the actual rent being paid by the tenant.” So while it’s hard to determine precisely where rent should be set for a re-regulated apartment, at most it should be the rent the current tenant is paying — meaning setting “legal” registered rents higher than tenants’ preferential rents, as the West 176th Street lease shows, is undeniably illegal.

“That’s the smoking gun,” says Carr.

DHCR insists it is enforcing the law. “We have zero tolerance for landlords who are trying to game the system by benefiting from the J-51 New York City–administered tax abatement and not registering their apartments as rent-regulated,” state Homes and Community Renewal spokesperson Charni Sochet told the Voice. As for setting rents too high on re-registered apartments, DHCR indicated that it can impose penalties on landlords who violate the law.

The state agency, however, has long had a reputation for weak enforcement. Until the creation of its Tenant Protection Unit in 2012, it only investigated whether apartments had illegally high rents if the tenant filed an overcharge complaint. But if landlords ceased to register apartments, they didn’t have to report rents to the state at all — making it nearly impossible for new tenants to tell if they were being overcharged.

“The DHCR is imposing, in most cases, no penalty for failure to register. That’s the real bottom-line problem here,” says tenant lawyer David Hershey-Webb, who says he has numerous cases involving scheme-swapped apartments.

The state housing agency says it is working to crack down on J-51 abuses. It says the Tenant Protection Unit analyzed rent-registration data to identify units that appeared to have disappeared from the registration rolls, including apartments receiving the J-51 benefit, and told their landlords that they had to either re-register them or document that they were lawfully deregulated. It adds that its Office of Rent Administration and statistical analysis unit are “using data mining and creating algorithms” to look through the registration rolls to find irregularities that could show illegal overcharges and deregulation.

Tenant lawyers, though, say it’s hard to tell if the state is cracking down on scofflaw landlords when DHCR won’t even release the names of the landlords that were caught violating J-51 rules in the first place. Attorney Robert Grimble filed a request for the list of names under the state Freedom of Information Law, but says it was denied on the grounds that it would “interfere with law enforcement.”

In May, Grimble, Carr, and other lawyers filed suit against DHCR to demand those names. “The list is important because it will better allow tenants, tenant attorneys, and tenant advocacy groups like HRI to enforce the rent-stabilization requirements of J-51 buildings that no agency is currently enforcing,” says Shaina Weissman, an attorney with Grimble & LoGuidice. “This could ultimately result in thousands of illegally deregulated apartments being returned to rent stabilization.”

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The J-51 fight is complicated by the fact that until 2009, DHCR allowed landlords to deregulate buildings receiving J-51 benefits, so long as the tax breaks were not the only reason the apartments had been regulated. But in that year, the state Court of Appeals ruled in favor of Stuyvesant Town/Peter Cooper Village tenants in the Roberts v. Tishman Speyer Properties case, who had sued their landlord, Tishman Speyer, after it raised rents in some apartments to more than $4,000 despite receiving J-51 benefits.

Two years later, a state appeals court ruled in Gersten v. 56 7th Avenue LLC that the rent-regulation requirement could be applied retroactively to apartments illegally deregulated before the Roberts decision. “There’s no argument anywhere for not registering after Gersten,” says Hershey-Webb, “but the DHCR still lets them not register.”

On August 16 of this year, the same appeals court muddied the waters, ruling 3–2 that an Upper West Side landlord who’d deregulated apartments while receiving J-51 benefits in 2003 did not have to re-regulate them, on the grounds that the 1997 state vacancy-decontrol law prohibits investigating rent overcharges more than four years old unless there’s evidence of fraud.

That ruling, however, would not seem to protect landlords who deregulated apartments after the Roberts decision, such as Trump son-in-law Jared Kushner. Kushner is another scheme-swapper, according to rent histories obtained by tenants with HRI’s help. In March 2015, his Kushner Companies bought 310 East 83rd Street on the Upper East Side as part of a sixteen-property portfolio for $131.5 million. (The seller, Stone Street Properties — notorious for harassing rent-stabilized tenants so it could charge more rent for vacant apartments — had paid $73 million for the buildings in 2012.)

Afterward, the rent on one vacant apartment almost doubled from July 2014 to July 2015, from $1,875 to $3,619, according to a rent history obtained by the current tenant. In 2016, Kushner stopped registering the apartment entirely, and when a new tenant moved in that September, he received an unregulated market-rate lease for $2,675.

Two months later, according to documents obtained by the Voice, Kushner attached a rider to the tenant’s lease informing him that while the apartment was permanently deregulated, it had to be rent-stabilized “solely because” the building was in the J-51 program. The rider set the “legal rent” at $4,279 — the last registered rent plus an 18.25 percent vacancy bonus — but said the tenant could keep paying $2,675.

In reality, according to Department of Finance records available online, the building had been receiving J-51 benefits since 1996, when the apartment cost $725. (The benefits expired in July 2017.) DHCR said it could not comment on whether the $4,279 “legal rent” was illegal, as its policy is not to release rent histories to anyone except the tenant of the apartment in question.

In April 2017, DHCR sent Kushner a letter directing the company “to register ALL individual apartments as rent-stabilized.” Two months later, it followed up with a threat to fine him at least $1,000 for each apartment that wasn’t registered. Kushner has not yet registered any apartments in the building, according to the state housing agency, and failed to show up for a pre-hearing conference this May. An evidentiary hearing, the equivalent of a trial, was scheduled for August 1, but was postponed.

Asked about the relatively low fines being charged — which could be worth no more than a month or two of the rent overcharges Kushner is receiving, Carr quips: “More than 10 percent of all political contributions at the state level are from real estate. This is what they’re paying for.”

Meanwhile, many of the buildings whose landlords received letters from Cuomo — including Scharfman’s at 709 West 176th Street and 710 West 173rd Street — are still receiving J-51 benefits, according to the Department of Finance. When the Upper Manhattan Scharfman tenant moved in in 2014, she says, her rent was about $1,650, but the lease said the legal rent was $2,650 — and she had to sign a rider stating that she understood that the apartment was “not subject to any form” of rent regulation “whatsoever.” When she renewed it in 2016, it didn’t include that rider, but it raised her rent to $1,770, and the “legal rent” to $2,770. (The maximum increase allowed by the city Rent Guidelines Board in 2016 was 2 percent.)

When she requested a rent history from DHCR, she adds, there were no records from 2012 through 2016. The last registered rent was $1,500 in 2011.

“How many more buildings is this happening in?” she asks.

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