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Huge legal test on rent regulation looms for landlords

A New York appeals court will hear on Thursday a case involving rent regulation and Tishman Speyer's role at Stuyvesant Town and Peter Cooper Village.

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September 9, 2009 11:57 a.m.
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Updated: September 9, 2009 3:19 p.m.

The number of rent-regulated apartments in the city could be dramatically altered by a case the New York state Court of Appeals is slated to hear in Albany Thursday. Rent paid by thousands of individuals and the income of hundreds of landlords could be significantly affected the decision, expected to be handed down by the end of the year.

The issue is whether landlords can deregulate apartments while simultaneously receiving what are known as J-51 tax abatements, which are given for making building improvements. In March, a lower court ruled that Tishman Speyer Properties has been illegally deregulating apartments at Stuyvesant Town and Peter Cooper Village because it was receiving the tax breaks. Former owner Metropolitan Life was also named in the suit.

The case is critical for Tishman Speyer, which bought the sprawling complex in 2006 for $5.4 billion with plans of deregulating substantial numbers of units to increase cash flow and pare down debt. Tishman Speyer vastly overestimated the number of units it could deregulate, and as a result, experts say the real estate firm may run through its cash reserves by the end of year. In a report issued last month, Fitch Rating said that a default is likely on the $4.5 billion portion of the loan that has been sold off to various investors if an equity infusion or recapitalization doesn't happen.

Sources said that the case has stymied Tishman Speyer's attempt to shore up the complex's finances to date. They also say that a loss would be devastating. One lawyer estimated Tishman Speyer might have to repay $200 million to tenants it overcharged, and it would not be able to deregulate more apartments.

Tishman Speyer declined to comment, but sources have noted the company was just following standard industry practice. In a court filing, it requests that even if the decision is upheld, any remedy should not be applied retroactively.

Jack Lester, an attorney representing Stuyvesant Town residents on a related matter, said it is possible the court won't tackle the issue of the retroactive rent even if it decides in favor of the tenants, which would likely lead to further litigation.

“The J-51 benefits were intended to maintain affordable housing in the city,” Mr. Lester said. “If the court upholds the decision it will help preserve access to affordable housing."

The court's decision affects landlords besides Tishman Speyer, although no one is sure just how many companies or apartments will be hit. About half the city's 2 million rental apartments are regulated. Apartments can be deregulated for several reasons but the majority leave the system when they are vacated and their rents hit $2,000.

“The question is why should those who can afford to pay $2,000 be protected by rent regulation?” said Frank Ricci, director of government affairs for the Rent Stabilization Association, a lobbying group for landlords.

Mr. Ricci said that the city's tax revenues would suffer if the court rules against Tishman Speyer because landlords pay assessments based on their buildings' income, and revenue would fall if rents can't rise or have to be rolled back. He noted that if landlords are forced to repay tenants some back rents, landlords would like demand that some of their taxes been returned.

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