Tenants Take The Hit As New York Fails To Police Huge Housing Tax Break

Tenants Take The Hit As New York Fails To Police Huge Housing Tax Break

by Marcelo Rochabrun and Cezary Podkul ProPublica, Dec. 4, 2015, 10:51 a.m.

When prominent New York developer Jed Walentas asked the city to approve a set of sleek towers on Brooklyn’s industrial waterfront last year, he pitched his company as a player that always abides by the rules.

The project, remaking the old Domino Sugar factory into a 2,300-unit apartment and office complex, would be the biggest ever for his firm, Two Trees Management. As with earlier projects, Two Trees would get millions in tax breaks in return for capping rents and reserving some units for low-income tenants.

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“We’ve done everything we always said we were going to do in every one of these projects,” Walentas assured the City Council at a public hearing last year.

City lawmakers signed off on the deal, and Mayor Bill de Blasio touted the use of public subsidies to create more affordable housing as a model for the future.

Another signature Two Trees project, however, stands as a model of something else: The failure of city and state regulators to effectively police the tax break at the heart of such deals and hold developers to their word.

An investigation by ProPublica into one of Two Trees’ major developments in downtown Brooklyn shows that regulators stood by as the company flouted laws requiring rent stabilization in exchange for a large property tax break it received.

Despite that requirement, the firm promptly told regulators that most of the apartments were exempt from rent stabilization when the complex at 125 Court Street opened in 2005. Then, over the next eight years, Two Trees repeatedly exceeded city limits on rent increases in the 321-unit luxury building, even overcharging the majority of its low-income renters.

Regulators took no action until 2011. Although they eventually informed Two Trees that it was out of compliance, they never moved to revoke the tax benefit.

In fact, they had never approved it in the first place.

In response to questions by ProPublica, city officials confirmed that 125 Court Street has yet to officially qualify for the tax break program, known as 421-a, even though Two Trees has received more than $10 million in tax savings that continue to this day.

ProPublica’s analysis of rent histories, meanwhile, shows that the building’s original tenants were charged at least $368,000 in excess rents. Two Trees confirmed that it had imposed “accidental” overcharges in the building’s early years, but said it later repaid tenants almost $300,000 plus interest.

Together, the overcharges and Two Trees’ lack of final approval show a city that is eager to give out tax breaks but loathe to police them, enabling developers to easily sidestep tenant protections under its single-biggest housing subsidy.

Long controversial, the 421-a program is now on the brink of an historic expansion. Under a deal brokered in Albany last summer, the $1.1 billion-a-year program would allow developers to claim longer tax breaks in exchange for providing more low-income apartments.

For the first time, the revamped law also would exempt most new apartments built with 421-a subsidies from rent stabilization.

Critics of the reforms have called them a giveaway that will ultimately push up rents, but there’s been little attention paid to the program’s regulatory shortcomings.

The city maintains that it is the state’s job to make sure tenants in 421-a buildings aren’t charged higher rents than the law allows. The state says it’s up to the city to administer and enforce the program. The result: A regulatory dead zone.

“Tenants are the only ones expected to do anything to enforce the law,” said Ellen Davidson, a tenant lawyer with the Legal Aid Society.

ProPublica began investigating 421-a this year after discovering that some landlords getting the tax break had overcharged tenants who didn’t realize their apartments in high-end buildings like 125 Court Street were rent-stabilized.

Subsequently, an analysis of city and state data showed that landlords had failed to register 50,000 apartments for rent stabilization, as required by law, yet continued to receive more than $100 million in 421-a and other tax benefits.

Regulators have recently busted some smaller landlords for ducking rent stabilization. But the history of 125 Court Street raises further questions, including why a landlord that violated rent limits for so long didn’t lose the tax benefits, and whether developers with compliance problems should qualify for new 421-a deals.

Neither Two Trees nor city officials were able to explain why the building still had no final certificate of 421-a eligibility a decade after tenants began moving in.

A spokesman at BerlinRosen, the public relations firm representing Two Trees, called it an “administrative oversight” that is being corrected.

Officials at the city’s Department of Housing Preservation and Development (HPD), which decides eligibility for 421-a, said they are “confident that the building will complete the necessary paperwork or the city will begin the revocation process.”

This account relies on rent records, leases and hundreds of pages of documents Two Trees has produced in court, as well as materials longtime tenants obtained via public records requests.

ProPublica also interviewed tenants, housing advocates and attorneys who are expert in rent-stabilization law. All five lawyers who reviewed leases and other documents agreed that Two Trees had violated the law. Based on the records, three described the city’s enforcement as “toothless.”

“Who’s watching the store?” said Phil DePaolo, a housing activist who opposed the Domino Sugar deal. “Nobody.”

Nine years after her husband died from cancer, Nancy Sher decided it was time to move. Sher, mother to twin girls, wanted something smaller than the family’s old townhouse in Brooklyn’s Prospect-Lefferts Gardens neighborhood.

A brand new building was coming to market on the edge of downtown Brooklyn not far away. “My children picked it,” Sher said of 125 Court Street. “We drove by it every time we drove to school.”

The 11-story complex had stores at the street level and housed a YMCA with membership deals for residents. One-fifth of the units in 125 Court Street were reserved for low-income tenants. The rest could be leased at market rates, but all of the building’s apartments were supposed to be subject to limits on rent increases set each year by the city’s Rent Guidelines Board.

By the time Sher moved, in May 2005, Two Trees was established as one of the city’s most successful developers. Under Jed Walentas’ father, David, the company was best known for transforming blocks of factories and warehouses near the Manhattan and Brooklyn bridges into the upscale Dumbo neighborhood.

Tax subsidies similar to 421-a helped the company redevelop those properties. As Two Trees planned 125 Court Street, David and Jed Walentas applied for more

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