How to Dump Tenants and Make a Fortune

How to Dump Tenants and Make a Fortune

How to Dump Tenants and Make a Fortune

The chaotic, abusive process through which New York City landlords turn affordable housing into luxury apartments.


It is 7:45 am, and 18 real-estate professionals are gathered around a conference table in downtown Manhattan, a hairbreadth from Wall Street. They are agents, insurers, asset managers, investors—there is even an architect who uses her allotted 30 seconds of introduction to mention her knack for creating spaces with high-end finishes on economical budgets. Everyone is here to listen to Simon Moule speak.

The topic, as described by the invitation, is “making sense of NYC Rent Stabilization Laws,” and Moule is a guru when it comes to understanding what he describes as “millions of rules.” The people in this room seek understanding with a specific endgame in mind: increasing capitalization of a building, if not a portfolio of buildings. As the lawyer who introduces Moule puts it: “If you know the rent laws, that’s where the juice is. You can really squeeze as much as possible out of a building.”

The Rent Regulation Reform Act of 1993 is a central feature of New York State’s rental code. It allows for the deregulation of rent-stabilized apartments. New York City has nearly 1 million such apartments, accounting for just under half of the available units in all five boroughs. That number is falling quickly, however, as New York’s high-end housing market continues to balloon from the heat of global capital.

Over the past 30 years, 231,000 units have been released from rent regulation. Between 2002 and 2014, the number of rental units that were affordable for the working poor fell by 27 percent, according to a Furman Center study.

The deregulation of these apartments has become one of the most disruptive forces in the city, as tenants scramble to keep their homes and landlords maneuver to get rid of them. In some cases, landlords seek merely to push individual units into the luxury rental market. But often the goal is to empty a building of renters altogether. As one Brooklyn landlord, who would only speak to me under the pseudonym of Ephraim, explained it: “We don’t usually buy buildings with tenants…. They actually bring down the value of the property almost 60 or 70 percent.”

So for Ephraim and the people gathered to hear Moule speak, the urgent question is: How do you get around rent regulations?

* * *

A few days after the breakfast meeting, Moule is seated in a coffee shop offering $3 drip, just south of Union Square. “In the hot areas, people are buying buildings and flipping them,” he explains to me, “playing musical chairs with the price.”

Moule has amassed more than 20 years of familiarity with the state rental code, and savvy investors come to him to understand how the mind-numbing legislative jargon applies to the buildings they want to buy. “Almost nobody realizes that the true value of a building isn’t the bricks and mortar,” he says. “The true value is the cash flow and the amount of debt you take on when you buy the building, and those are determined by the rent roll—and the rent roll is determined by the rent-stabilization laws. So many people miss that essence.”

Rent-stabilization laws apply, broadly, to buildings constructed in the postwar period from 1947 to 1974, as well as to more recent developments that used tax breaks or public money to build. The rental code makes for dense reading; it’s a tangle of bureaucracy. But there is one essential component for tenants: an annual limit on rent increases. The New York City Rent Guidelines Board sets this limit. Each year, the board votes on one of three options: roll back rent for the coming year; freeze rent; or set an allowable increase, generally somewhere between 2.5 percent and 4 percent over the last decade. In 2014, amid whispers of a first-ever freeze or rollback, the board voted for a 1 percent increase.

The final vote this year is on June 24, and there is a growing sense among community organizers and officials in Mayor Bill de Blasio’s administration that a rent freeze is a real possibility this time.

But a more fundamental marker is set by the state. Since 2011, the state has allowed for the deregulation of vacant apartments once they can be legally rented for $2,500 a month. At press time, as the legislative session closed, housing advocates were fighting what appeared to be a losing battle to push that number up significantly, if not get rid of it altogether. “So that we don’t have what is clearly happening,” says Alicia Glen, deputy mayor for housing and economic development, “which is people using every available tool in the toolbox to get to the $2,500 threshold.”

Moule incorporated STM Associates 19 years ago and works with over 300 clients—increasingly, he notes, more pension and portfolio money from around the world. “They know that if they—by good fortune or malfeasance—­get rid of low-paying tenants and put in high-paying tenants, they’re going to make more money.”

The legal way to get rid of low-paying tenants is a buyout. Landlords can offer tenants money to simply leave. This practice has become so popular and generates such substantial business for real-estate lawyers that two of them, ­Michelle Maratto and Jay B. Itkowitz, released a 33-page document entitled “Tenant Buy Outs! Making Them Happen.” It reads like an infomercial script from the opening line: “Sometimes an owner needs a tenant of his or her property out of the way.”

The amount of money that a landlord might offer a tenant varies wildly. Ephraim, the Brooklyn-based landlord, estimates he’s bought out dozens of tenants, paying each somewhere between $2,000 and $30,000. The real-estate lawyer who introduced Moule at the breakfast meeting—and who also asked me not to use his name for fear of losing business—said he has facilitated buyouts ranging from $10,000 to $100,000.

But a lump sum of money—no matter the amount—has limitations. “If you’ve never seen $20,000 before, it seems like a lot,” says Celia Weaver, assistant director of organizing and policy at the Urban Homesteading Assistance Board (UHAB). “But your rent is never going to be lower than it is right now. Unless you’re leaving the city or buying into some form of affordable housing, a buyout is never going to be a good idea.”

Across New York City, particularly in Brooklyn, rents have risen sharply over the last several years. Between 2013 and 2014 alone, rents increased roughly 23 percent in both Crown Heights and Boerum Hill, for instance. With rent for market-rate apartments making such steep climbs, and wages remaining mostly stagnant, the loss of each rent-stabilized unit makes the housing problem that much more acute. And buyouts are a driving force.

“As a public-policy matter,” says Deputy Mayor Glen, “buyouts are bad in the current regulatory environment.” She points to the “vacancy allowance” a landlord earns each time an apartment is emptied, which allows for a rent increase of up to 20 percent and is often enough to break out of rent stabilization. “Because the vacancy allowance is so generous, it’s being done to deregulate the apartment.” Even still, Glen describes buyouts as a complicated issue. “With any individual case, who am I to tell someone they shouldn’t take $100,000?”

* * *

When a landlord wants to avoid the expense of a buyout, or if a tenant refuses to accept one, more aggressive measures are required. Shekar Krishnan of Brooklyn Legal Services Corporation A represents tenants in neighborhoods throughout the borough. “What we see a lot more now,” he says, “is landlords physically destroying buildings to force tenants out overnight. It’s the method of choice these days.”

Originally from Nicaragua, Noelia Calero, 33, has lived in her railroad apartment in Bushwick since she was 9 years old. She sits in a middle room that is hard to define: All at once kitchen and closet and living room, it is a cramped space, packed with boxes stacked to the ceiling along every wall. The table where Calero sits feels like the cleared middle of a storage unit.

Shortly after two brothers, Joel and Aaron Israel, bought her building in early 2013, they sent a letter to Calero and her husband. “They told us they want to change the floor tiles and put paint and fix the bathroom,” she says. So Calero and her husband and mother moved all of their belongings out of the kitchen and bathroom. “They said it was going to take a couple of weeks. And we believed them. But then we had two years with no bathroom, no kitchen. Completely demolished.”

Calero describes the Israel brothers entering her apartment with a third man who carried a sledgehammer and electric saw. “They took out the walls that divided my bathroom from the neighbor’s kitchen. You could just walk right next door. They ripped the walls open and the floors. They completely destroyed the sink that was in the kitchen. In the bathroom, too, they removed the toilet and the sink…. It took them less than two hours and they left.”

Calero’s family lived without running water for 18 months, and for much of that time a hodgepodge barricade of scrap and plywood closed off access to the back half of the apartment, which led to the bathroom and kitchen. The family listened to the sounds coming from the other side of the plywood. “We heard rats and we heard cats fighting back there.”

Finally, in December 2014, after she had spent more than two years in court with legal representation from Brent Meltzer of South Brooklyn Legal Services, Calero’s landlords were ordered to repair her bathroom and kitchen. And in April of this year, in a highly unusual move, Joel and Aaron Israel were arrested and charged with seven crimes, including fraud, grand larceny, burglary, submitting false documents, and unlawful eviction.

“While it’s very hard to know what is an outlier versus a chronic pattern,” says Deputy Mayor Glen, speaking about the arrests of the Israel brothers, “I do think there has been a dramatic increase in landlord harassment.”

She points to an anti-harassment task force that Governor Andrew Cuomo established in February with Mayor de Blasio and New York State Attorney General Eric Schneiderman, describing it as an opportunity for the city and state to work together to investigate cases like Calero’s. “We want to really make sure we have every possible tool in our toolbox when we think that something really rises to the level of criminality.”

While tenant lawyers like Krishnan describe the Is­rael brothers’ arrests as justice, many are not satisfied with the bigger picture. “The real question,” says Krishnan, “is why didn’t these arrests come sooner?” He shows me a batch of newspaper articles documenting tenant experiences with striking similarities to Calero’s case. “This is the most rapidly growing trend we’re seeing. These landlords feel—and they are criminal landlords—if we can provoke a vacate order from the city government, we can get tenants out overnight, and then it’s a long, hard fight to get back in. And if they don’t have counsel, it’s a fight that is almost impossible.”

* * *

Not all tactics for clearing tenants are so unabashed as those of the Israel brothers. Some landlords choose more subtle, often litigious options. “Baseless eviction proceedings,” says Krishnan, “that’s usually where it starts.”

There are several roads to eviction proceedings: perhaps it’s one too many roommates; perhaps it’s suspicion of an illegal sublet. Landlords scan Airbnb for units in their buildings, and surveillance cameras are common. Even death can be used to prompt an eviction notice.

At the age of 20, Nefertiti Macaulay moved in with her ailing grandmother. She is 31 now and has been the primary tenant in the apartment since her grandmother’s passing in 2007—which is when the landlord contacted Macaulay with a shocking declaration. “A note of eviction saying I am squatting,” she says. Her soft voice has to climb a bit higher to get up and over that last word—squatting—­because it still feels like a violation. She points at the chair near the window where her grandmother spent her last days. “She passed away, and it was thrown at me.”

Macaulay’s home is spacious, with comfortable furniture and generations of family photos. But rats run across the kitchen, water damage is visible, and the walls have not been painted in nearly a decade. While living with her grandmother, Macaulay had not been added to the lease and none of the bills were in her name. In court, she offered documents signed by the super and the neighbors and the medical care providers who visited her grandmother daily—all confirming that Macaulay lived there. But she did not have a document confirming that she paid for the gas or electricity.

After a court case that spanned a year, the judge let Macaulay stay in the apartment—at a 54 percent markup. Her rent went from $750 to $1,156. “I think they wanted to scare me, so I said, ‘I’ll take it.’” At times she works two jobs to pay the new rent, but she’s grateful to still be in her home. Her landlord has not yet succeeded at emptying the apartment, in large part, because Macaulay has legal counsel. That is a rarity for tenants.

“Ninety percent of tenants in housing court don’t have a lawyer,” says Krishnan. He estimates that Brooklyn Legal Services Corporation A is able to engage just 15 to 20 percent of the tenants who approach his office for legal aid.

Deputy Mayor Glen—who is quick to underscore that she once worked as a legal-aid lawyer—ties this imbalance of power to federal funding for legal-assistance programs; Congress has cut that funding by more than 40 percent over the past decade, according to a Legal Services Corporation analysis. Glen says the city is trying to close the gap. “Recently, we put a ton of money into the budget to expand legal services, particularly in areas where landlord behavior could be on the margins,” says Glen. “We want to make sure in neighborhoods where markets are moving so quickly, people have the ability to get a lawyer.”

The de Blasio administration has committed $13.5 million for tenant legal services and outlined a plan that would provide an additional $36 million in legal aid for six neighborhoods experiencing rapid change and rezoning: East New York, East Harlem, Flushing West, Long Island City, the Bay Street Corridor on Staten Island, and the Jerome Avenue Corridor in the Bronx. That would be a cumulative $50 million for tenant legal services, which Glen points out is eight times the $6 million provided under Mayor Michael Bloomberg.

* * *

But it takes more than money when a landlord seeks to simply wear a tenant down with multiple, often simultaneous tactics. Take, for example, Toussaint Wortham, who was approached by his landlord with a $30,000 buyout offer. Wortham turned it down. Then his landlord took him to housing court for installing kitchen cabinets.

Wortham had installed the cabinets five years earlier, with permission and funds from the previous landlord. The old cabinets dated back to 1979, the year Wortham moved into his Crown Heights apartment with his family. He was in the first grade then, and has never lived anywhere else.

“He’s been saying he can’t take my rent until the case is resolved,” Wortham says of his landlord’s position. “They bank on the idea that you’ll mess that money up. They figure I might see a nice coat that I want, or nice pair of jeans, and I’ll spend it. I’m not that kind of person. I’ve got one pair of jeans.”

Still, he admits that it’s sometimes hard to keep up his fight, to hunt down one more document or take another day off work to make another court appearance. After a recent adjournment in the ongoing case, Wortham rode the elevator down with his landlord’s lawyer, who took the opportunity to remind him that the $30,000 buyout is still on the table.

Simon Moule knows how demoralizing this war of attrition can be. “Tenants file complaints about decreased services or their rent is illegal, and I answer those complaints on behalf of owners. That’s where stuff is interesting and difficult. Because I might have a client who I know is a scumbag, and they run their buildings terribly and their tenant is filing a complaint about stuff that’s not fixed in their apartment, and I know the stuff isn’t fixed in the apartment. But I’m being hired to file an answer as though the owner did fix stuff.”

While New York State is often cited as a jurisdiction with some of the most pro-tenant rent laws in the country, there is often a chasm between the laws and their enforcement. “The law is whatever you can get away with,” says Krishnan. “So many tenants will call us and say, ‘I lost my heat and my electricity today and I can’t get it back on.’ That is one of the most pernicious things.” Oftentimes, the utility accounts are in the landlord’s name, and the utility companies won’t restore service unless the request is made by the person on the account. Krishnan says he has worked with tenants in buildings where the landlord has jiggered wiring in order to prevent restoration of services, or padlocked the meters so that the utility companies cannot gain access.

In a building in the Bedford-Stuyvesant neighborhood of Brooklyn, the tenants lost heat and electricity on a Friday in January. “It was one of the coldest weekends of the year, and no one was available,” says Krishnan. “One of my attorneys went to a judge’s house on Saturday night to get an emergency order signed. And then he went and served the order to the utility companies to get services back on. That’s how screwed up this is.”

* * *

On a recent May morning, muggy with gray clouds overhead, a dozen or so tenants gathered outside their building at 285 Schenectady Avenue in Crown Heights. Many of them held signs with slogans—We shall not be removed—or large pictures of dead rats in hallways and roaches gathered in darkened corners. A handful of supporters from the neighborhood joined the protest, along with New York State Assembly members Walter T. Mosley and Diana Richardson. Renaissance Realty, the landlord of the building—and of a neighboring building that shares a mortgage—has taken 17 tenants to court because they refuse to sign new leases. The tenants say they will not sign because the new leases will increase their rent by 120 percent. That’s a 120 percent increase in two buildings filled with rent-stabilized units.

The 2014 maximum allowable rent increase of 1 percent for rent-stabilized apartments does not apply to 285 Schenectady because of the building’s complicated rental history—and an obscure rule that offers a fast track out of regulation for more than a quarter of the city’s rent-stabilized units.

Decades ago, a previous landlord at 285 Schenectady performed renovations—or in the parlance of rent regulations, “individual apartment improvements,” known as IAIs. The landlord passed along a portion of the renovation costs to the tenants, as prescribed by law. Once the landlord performed the IAIs, he presented the tenants with leases that included two separate rent rates. The first rate was the new “registered” rent, starting at around $800 for the cheapest units. That was far more than anyone could pay in Crown Heights in the 1980s, but it was the maximum increase the New York State Division of Homes and Community Renewal would allow, based on the renovation budget the landlord submitted. The second rate on the lease was a far smaller amount, a “preferential” rate, which is what the landlord actually charged.

When a lease is drawn up with two rates in this way, the landlord reserves the right to switch from the preferential to the registered rent with any new lease. “You can use preferential rents and IAIs together as a sort of gentrification insurance,” says the UHAB’s Weaver, who is working with the tenants at 285 Schenectady. “As soon as the market rate is somewhat close to what you registered the rent at, thanks to IAIs, you revoke that preferential rate, and the tenant is screwed.” When landlords use this rule, the registered rent is often set at or near the threshold at which an apartment is no longer subject to the rent-stabilization laws.

The tenants at 285 Schenectady have been paying a preferential rate—which has steadily increased, along with the registered rent—since 1988. When Renaissance Realty bought the building in April 2014, the company began notifying tenants that the rate would change as each lease came up for renewal. The rent for many units in the building went from less than $1,000 to $2,100.

Of the nearly 1 million rent-regulated apartments in New York City, the state estimates that 25 percent, nearly 240,000, are under preferential rates and subject to sudden increases. Measured against de Blasio’s goal to build 200,000 more affordable units, preferential rents alone present a possible net loss of 40,000 affordable units.

Outside 285 Schenectady, Natasha Creese, who has lived in the building for 25 years, ended the rally by grabbing the megaphone and stepping toward the edge of the sidewalk. She eyed the onlookers across the street, and peered up at the buildings around her: “Everyone who’s looking out their windows, I know you’re hearing me. Look around—your turn will be next.”

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