Kuzmich et al. v. 50 Murray Street Acquisition LLC: A Deal Gone Bad for Developers Who Helped Revitalize Lower Manhattan
In Kuzmich et al. v 50 Murray Street Acquisition LLC, 34 N.Y. 3d 84, the Court of Appeals held that apartments in buildings receiving tax benefits under Real Property Tax Law (RPTL §421-g are not eligible for luxury deregulation under the Rent Stabilization Law (RSL), unlike most other rent-stabilized apartments. To appreciate the importance and consequences of this decision, one must understand the history of RPTL §421-g.
In 1993, lower Manhattan was in sharp decline. Following the World Trade Center bombing, vacancy rates in commercial buildings soared and their assessed values plummeted. Many commercial buildings in lower Manhattan were outdated and unfit to accommodate growing and changing industries. The nightly exodus of office workers leaving to return to their homes left lower Manhattan a virtual ghost town after business hours.
To turn the tide, then-Mayor Rudolph Giuliani proposed the Lower Manhattan Revitalization Plan (the LMRP). A key component of the LMRP was RPTL §421 g, which provided tax benefits to commercial building owners that converted either all or part of their buildings into residential apartments. The purpose of the 421 g program was to remove unused commercial space from the market and create a thriving, 24-hour community in lower Manhattan where people both live and work.
By any measure, the 421-g program did just that; it breathed life into lower Manhattan by fostering the creation of more than 25,000 residential apartments, transforming it into a full-blown residential district.
How were owners and developers incentivized to create new residential housing? While the newly created apartments were subjected to the RSL for a period of time in exchange for the receipt of tax benefits under the 421-g program, the statutory text and legislative history made clear that all of the RSL applied — including its deregulatory provisions. One such provision was codified at RSL §26- 504.2(a). As is relevant here, RSL §26-504.2(a), enacted just two years prior to RPTL §421-g, permitted the “luxury” deregulation of a rent-stabilized apartment where a vacancy occurred and the legal regulated rent exceeded $2,000 per month. Crucially, however, if the “first rent” of a newly created apartment that would have otherwise been rent stabilized exceeded the $2,000 deregulatory threshold, the apartment was immediately deregulated and could be rented at a market rate.
Based on this understanding, developers availed themselves of 421-g tax benefits while creating thousands of new, mostly luxury apartments in lower Manhattan, which were in large part rented to wealthy tenants at market rates. Nevertheless, of the 25,000- plus apartments created pursuant to RPTL §421-g, approximately 2,500 had first rents that were low enough to keep them within rent stabilization. Thus, considerable new “affordable” housing was created as well.
There was no doubt among anyone in the real estate industry or the Legislature that luxury deregulation applied to 421-g apartments. In fact, Franz Leichter, the sole senator who voted against the LMRP, conceded on the Senate floor that luxury deregulation applied in 421-g buildings. This understanding was confirmed in correspondence between Mayor Giuliani and then-Senate Majority Leader Joseph Bruno. Administrative guidance issued by the Division of Housing and Community Renewal (which administers the RSL) and the Department of Housing Preservation and Development (which administers RPTL §421-g) further cemented this understanding and induced owners and developers to convert their commercial buildings to residential apartments pursuant to the 421-g program. Perhaps most importantly, RSL §26-504.2(a) itself contained three enumerated exceptions to luxury deregulation, and apartments in 421-g buildings were not among them. Accordingly, there was only one rational conclusion to be drawn: luxury deregulation applied to 421-g apartments.
Nevertheless, in 2016, a group of tenants in the 421-g buildings located at 50 Murray Street and 53 Park Place commenced an action against their landlord seeking, inter alia, a judgment declaring that their apartments had been wrongfully deregulated, the recalculation of their rents, reimbursement of all overcharges, treble damages, and attorneys’ fees. Both sides moved for summary judgment. On July 3, 2017, Supreme Court, inter alia, held that the apartments are subject to rent stabilization and that the rents charged to the tenants since the commencement of their tenancies were unlawful.
The landlord appealed Supreme Court’s ruling. By order entered on Jan. 18, 2018, the Appellate Division, First Department reversed Supreme Court and held that while “dwellings in buildings that receive tax benefits pursuant to [RPTL] §421–g are subject to rent stabilization for the entire period the building is receiving 421–g benefits,” the absence of 421-g buildings from the listed exceptions in RSL § 26-504.2(a) was dispositive: “421-g buildings are subject to the luxury vacancy decontrol provisions of [RSL] §26–504.2(a), unlike buildings that receive tax benefits pursuant to [RPTL] §§421–a and 489.” Kuzmich v. 50 Murray Street Acquisition LLC, 157 A.D.3d 556. While the tenants argued that the language of RPTL §421-g alone exempted apartments created pursuant thereto from luxury deregulation, the Appellate Division, reading the relevant statutes together, disagreed and held that “[RPTL] §421–g does not create another exemption to [RSL] §26–504.2(a).” Id. The Appellate Division thereafter granted the tenants leave to appeal to the Court of Appeals.
Contributing Advisors
Richard L. SussmanMember, Rosenberg & Estis, P.C.
