A group of building owners claims New York’s housing regulator is unlawfully coming after them for deregulating their rent-stabilized properties.
“Balanced Housing Solutions,” the group listed as plaintiffs and led by political consultant Hank Sheinkopf, is suing the Division of Homes and Community Renewal, alleging that the agency is wrongfully applying rule changes around “substantial rehabilitations” that went into effect in 2023. Former mayoral candidate Jim Walden is the group’s attorney on the case.
Substantial rehabs are one of the only remaining avenues for owners looking to deregulate stabilized apartments after the state passed sweeping rent reform legislation in 2019.
The state defines a substantial rehab as the replacement of at least 75 percent of a building’s systems in a property that is “substandard or seriously deteriorated.” It matters how the building got that way: An owner can’t deregulate their building if they drove tenants out through harassment or, on the extreme end, arson.
One way owners used to be able to prove a building was “substandard or seriously deteriorated” and in need of renovation was if it was at least 80 percent vacant. The thinking was that if a building was mostly vacant, it was in bad shape and needed an overhaul.
HCR proposed eliminating that option in 2022, and then finalized getting rid of it in November 2023.
In June of that year, state lawmakers approved legislation that would have required owners of buildings that had undergone substantial rehabilitation to submit applications to HCR within six months of the bill becoming law. In other words, the agency would need to retroactively approve deregulation for every building that had been gut-renovated and deregulated. In some cases, this would have happened decades ago. The measure also reiterated the emphasis on the need to prove that a building was in “substandard or seriously deteriorated condition,” with no mention of a vacancy threshold.
Gov. Kathy Hochul approved the measure, but with key changes, such as striking the retroactive nature of the bill: The new application rule would apply to substantial renovations initiated on or after January 1, 2024. Owners, from that point on, would need to submit applications to the state within one year of completing a substantial rehab in order to legally deregulate the building.
The group of owners suing the state argues that, despite completing work before November 2023, when HCR issued its new rules, the agency is trying to enforce the new regime, demanding proof that a building was “uninhabitable” rather than just at least 80 percent vacant.
The move violates the Fifth Amendment’s takings clause, according to the lawsuit.
“The bottom line here is that BHS’s members invested tens of millions of dollars in rehabilitating housing for New Yorkers, and HCR is attempting to seize and/or redistribute the fruits of that investment through a fundamentally unfair, retroactive application of new rules to already completed projects, despite the fact that the Governor and then the Legislature expressly rejected any retroactive application of the Amendments,” the lawsuit states.
The lawsuit, filed in the U.S. District Court for the Eastern District of New York, seeks an injunction barring the HCR from retroactively applying the November 2023 rules to substantial rehabs that were initiated before the new guidelines.
An HCR spokesperson said the agency doesn’t comment on pending litigation.
Jim Walden, attorney for Balance Housing Solutions and previously an independent candidate for mayor, would not disclose specific properties or owners who are part of the group that filed the lawsuit. During a video press conference on Wednesday, he said the specific owners would not be disclosed at this point due to fear of retaliation from regulators. Presumably, if the lawsuit continues, the claims of specific owners will need to be presented to the court.
The owners renovated 31 buildings, all of which were at least 80 percent vacant at the time, according to the lawsuit. HCR is calling for the properties to be re-regulated and for the owners to reimburse tenants for rent overcharges resulting from the buildings’ deregulation, the lawsuit states.
The lawsuit also alleges that HCR has erroneously determined that any vacancies achieved through buyouts can’t count toward the 80 percent threshold. Walden indicated that HCR applied this interpretation of the 80 percent rule sometime in 2023, though it isn’t clear if this happened exclusively before the November 2023 rule change.
The Real Deal previously highlighted HCR’s rejections of a rehab application at 117 North Fourth Street in Williamsburg. An entity called Creas Inc. bought the building for $9.75 million in 2023 from an LLC linked to Jeff Sutton’s Wharton Properties.
The building was deregulated after a substantial rehab in 2022.
HCR said one of the reasons the renovation didn’t meet its criteria was because three tenants who vacated the building had accepted buyouts ranging from $150,000 to $175,000. The agency maintained that the pricing of the buyouts suggested the properties weren’t in poor shape.
Walden, who dropped out of the mayoral race ahead of the general election and endorsed former Gov. Andrew Cuomo, has been critical of Mayor-elect Zohran Mamdani’s plan to freeze rents for stabilized tenants for four years. He indicated on Wednesday that the lawsuit would likely be the first of many battles related to bringing “more common sense to the city” when it comes to maintaining and growing the city’s housing stock.
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