Stuyvesant Town / Peter Cooper J-51 Decision May Put Your Co-op At Risk!

The J-51 Program is a tax incentive for the rehabilitation of multi-unit residential buildings. In 1992, the owners of Stuy Town and Peter Cooper, two complexes on the East Side of Manhattan, which contain over 11,000 rent-stabilized apartments, obtained J-51 abatements from New York City for qualifying work done there.

Apartments in rental buildings receiving J-51 benefits must be rent-stabilized while the tax benefits are being received. In 1993, the state legislature enacted the Rent Regulation Reform Act, which provided for the decontrol of apartments (enabling the rents to go free-market) if the legal regulated rent was $2,000 per month or more and the apartment was either vacant or the combined income of all occupants of the apartment exceeded $250,000 per year. This is nicknamed "luxury decontrol."

There was an exception made for apartments that were rent-stabilized because they received J-51 benefits. In those cases, apartments could not be luxury-decontrolled while benefits were being received.

In 1996, the former owners of Stuy Town and Peter Cooper obtained an opinion from the Division of Housing and Community Renewal (DHCR), the state agency that monitors the housing law. The opinion indicated that, because the two properties' receipt of J-51 benefits was not the sole reason they were rent-stabilized, apartments could be luxury-decontrolled.

Reversal of Fortune

In early 2007, nine current and former tenants of the two properties, whose rents were increased to market level because of luxury decontrol, sued the current and former owners of the two properties for rent overcharges, claiming that the landlord's interpretation and DHCR opinion was incorrect and that no landlord benefiting from J-51 could obtain luxury decontrol until the J-51 benefits ceased. The Supreme Court, New York County, dismissed the case, but that decision was reversed by the appellate division, thereby supporting the tenants' position.

Therefore, the current law is that a landlord receiving J-51 tax abatements cannot utilize luxury-decontrol. But several questions, which will likely be the subject of years of further litigation remain:

• Do the apartments that were destabilized at the two properties revert back to rent-stabilization?
• Do the tenants have their rents reduced to where they would have been if the landlord never took them out of rent stabilization?
• What is the effect of the landlord having relied on an opinion from DHCR?
• What, if any, rights and damages do the tenants have who moved out of the two properties because their rents went above $2,000?
• What, if anything can and will the legislature do to deal with this situation?
• If the current owners of the two properties file for bankruptcy, what is the effect of the decision?

How does this affect cooperatives and condominiums? Not at all if your building does not receive J-51 benefits or does not have rent-controlled or rent-stabilized tenants. Buildings that were built as co-ops or condos and buildings not containing unsold shares or unsold units are unaffected.

Unfortunately, although Section 2520.11(l) of the Rent Stabilization Code (RSC) provides that co-ops and condos are not subject to the rent laws, there is a possibility that a cooperative or condominium that owns unsold apartments and obtained the benefit of the J-51 law will be subject to similar rent-overcharge claims by tenants whose rents went to market.

Danger for Co-op & Condo Boards

Another potential problem involves boards of buildings with unsold shares held by a sponsor or an investor. If the board obtained J-51 benefits, would the sponsor or investor have a claim against the board because of the rent overcharge? The answer will depend on the precise terms of the offering plan and the condo bylaws or co-op proprietary lease. If any of these documents makes the co-op or condo responsible when the board takes an action that has an adverse impact on an owner with tenants, then the co-op or condo may have to reimburse the owner for such cost. Theoretically, a holder of unsold shares or units could also make the claim for reimbursement even if the bylaws or proprietary lease are silent, though such a claim would be more difficult to establish.

The most frightening scenario is where a sponsor obtained J-51 benefits and then used luxury decontrol to vacate apartments that were then offered for sale. The problem would occur if the courts rule that any tenant who lost his or her apartment because the landlord improperly raised the tenant's rent would have a right to return to the apartment or the building. Such an event is unlikely, but it possible.

The decision will have a significant impact on New York housing, with unforeseeable repercussions. It is critical that boards of buildings with unsold rental apartments follow future developments stemming from it.

Stuart Saft is a partner at Dewey & LeBoeuf.

Adapted from Habitat January 2009. For the complete article and more, join our Archive >>