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RENT STABILIZATION AND REGULATORY DUE DILIGENCE FOR MULTI-FAMILY PROPERTIES

When you buy a multifamily building, you hire an engineer to make sure that the building is not going to fall down. However, a multifamily building is so much more than bricks and mortar. A multifamily building is tenancies.

Michelle Itkowitz can look at a building and see it in a way that an engineer, architect, transactional lawyer, or non-lawyer consultant simply cannot – she sees the tenancies at the heart of the building and any problems that come with them. Therefore, she offers her singular Rent Stabilization Due Diligence product.

  1. What is Rent Stabilization Due Diligence?

    The old saying goes that the three most important things about real estate are: location, location, and location. Keeping that rule in mind, one should add a rule about the three other most important things about multifamily real estate in New York City, and those things are: the tenancies, the tenancies, and the tenancies. A building's value is a function of the tenancies.

    How do you know, before you buy a piece of multifamily real estate in New York City, that the tenancies are what the seller says they are? That the allegedly “free-market” units are really deregulated? That the Rent Stabilized unit’s rents are legal? That the tenant, whom, seller tells you will be easy to evict over non-primary residence, really can be? How, for that matter, can the seller be sure?

    Children have the same problem understanding their multifamily buildings when they inherit multifamily real estate from their parents. Banks have the same problems when lending on multifamily assets.

    EXAMPLE

    Two gals in Brooklyn bought an eight-family building with only three Rent Stabilized apartments occupied. One of the occupied Rent Stabilized apartments was clearly not being used by the tenant as his primary residence. In fact, the tenant lived elsewhere and he was using the apartment solely as an office for his party-planning business.

    The new owners were excited to start a case against this tenant. But they could not! The tenant’s Rent Stabilized lease had long ago expired. You can ONLY do a non-primary residence case by first sending what is known as a “Golub Notice”, a special notice of non-renewal that can only be tendered between 150 and 90 days of the lease expiration. If there is NO LEASE, the lease can’t end. NO ENDING DATE means no Golub Period. NO GOLUB PERIOD means NO NON-PRIMARY RESIDENCE CASE. The only thing these new owners could do was to send this tenant, who was so clearly not living there, a new Rent Stabilized lease and wait two more years, until 90 to 150 days before the next lease expiration, to do a non-primary residence case!

    This would have been detected if these gals had run a proper Rent Stabilization Due Diligence Analysis.

  2. Why is it so hard to tell if an apartment is subject to rent stabilization?

    There is no official list somewhere that definitively tells the world which apartments are subject to Rent Stabilization and which are not. The New York State Division of Housing and Community Renewal (“DHCR”) has jurisdiction over matters relating to Rent Stabilization and the DHCR maintains some records. But the records the DHCR maintains contain information that is largely self-reported by landlords and that is not controlling with regard to an apartment’s Rent Stabilization status. Therefore, year after year, a landlord can report to the DHCR that an apartment is “permanently exempt”, but that does not make it so.

    Moreover, a current or former tenant may have signed a document acknowledging that an apartment is not subject to Rent Stabilization. But this, also, does not make it so. Parties may not contract out of Rent Stabilization coverage. See RSC § 2520.13 (Waiver of benefit void); Drucker v. Mauro, 30 A.D.3d 37 (1st Dept 2006) (“It is well settled that the parties to a lease governing a rent-stabilized apartment cannot, by agreement, incorporate terms that compromise the integrity and enforcement of the Rent Stabilization Law.”)

    It is very important to keep in mind that a court or the DHCR can look back as far as they want to determine whether an apartment is subject to Rent Stabilization. While a rent overcharge claim is subject to a four-year look back period, a claim for improper destabilization is not. 72A Realty Associates v. Lucas, 28 Misc.3d 585 (N.Y.City Civ.Ct., 2010), Affirmed as Modified by 72A Realty Associates v. Lucas 32 Misc.3d 47, (AT1st 2011), Affirmed as Modified by 72A Realty Associates v. Lucas, 101 A.D.3d 401, (1st Dept. 2012); Gersten v. 56 7th Avenue LLC, 88 AD3d 189 (1st Dept. 2013).

    How do you ever get a definitive answer on an apartment’s Rent Stabilization status? With some exceptions, the last word on whether an apartment is Rent Stabilized is in the hands of the courts or the DHCR. Until a judge is satisfied that an apartment is not Rent Stabilized, the matter is always, in some measure, unsettled.

    Why is this so complicated? Because it is. There are many statutes and mountains of case law, stretching back to the 1970’s, that, when woven together, make up the rent regulatory scheme in New York City. Often enough the various courts and agencies do not agree with one another on vital topics (think High Rent Vacancy Deregulation under J-51 or the Altman case); and when the authorities do not agree, it takes years for their disputes to percolate up to the New York’s highest court for a definitive answer. There are rules, and exceptions to the rules, and exceptions to the exceptions to the rules. And it’s getting harder all the time…

  3. What, exactly, do you look at in a Rent Stabilization Due Diligence Analysis?

    There are four broad categories of things that Michelle Itkowitz looks at in a Rent Stabilization Due Diligence (“RSDD”).

    1. Are there any general problems that would stymie a landlord and tenant proceeding, should one be necessary? Or that would give rise to liability of the landlord to tenant? If so, how can the landlord fix the problem?
    2. Are there any problems with the Rent Stabilized tenancies? Is the leasing correct? Are the registrations correct? Are there overcharges?
    3. Are the free-market tenancies really free market, or are they really Rent Stabilized? Illegal deregulations are everywhere.
    4. Is the owner (or prospective owner or lender) making any wrong assumptions? A big part of Michelle’s work in RSDD is testing a client’s assumptions about the property.

  4. When does a Rent Stabilization Due Diligence Analysis get performed?

    We refer to the process as "Due Diligence", but we can perform the analysis before a contract is entered into, during a due diligence period, or long after a property is purchased.

    I often get hired for these gigs when a property is being handed from one generation to another.

  5. Who hires you for Rent Stabilization Due Diligence Analysis?

    We have performed this service for purchasers, sellers, owners, and lenders.

    We also frequently work closely with corporate counsel, real estate transactional counsel, and trusts and estate counsel who bring us in to consult on the rent regulatory aspects of their matters.

  6. Wait?! I already do “due diligence”, what are you adding?

    Michelle and her team can look at a building and see it in a way that an engineer, architect or tax or transactional lawyer cannot. We see what is at the heart of the building - the tenancies and the ability of those tenancies to create or to stymie revenue generation. If your due diligence protocol does not include highly experienced landlord and tenant counsel, then you are missing a huge piece of due diligence. You hire an engineer so you can know that the bricks and mortar are sound. Why wouldn’t you hire a landlord and tenant litigator with tremendous experience to tell you whether the tenancies are sound?

  7. What kind of report do I get? How long is it? What does it look like? Can I ask follow up questions for no extra charge?

    Your Itkowitz PLLC Rent Stabilization Due Diligence report will be written in plain language. I seldom do a RSDD under thirty pages. I have never gone over sixty. The RSDD Report will contain:

    • A detailed fact section.
    • Sections devoted to educating you on the law.
    • Analysis sections, which apply the law to your particular facts.
    • Conclusions with respect to each apartment, supported by facts and law and explained clearly; I will be assigning a numerical percentage of likelihood to my conclusions.
    • A table of contents and an executive summary.

    This Rent Stabilization Due Diligence process is about more than just getting a report. The due diligence process is an interactive and iterative one. Once your team gets the Rent Stabilization Due Diligence Analysis, they can take time to digest the information. Then you can ask questions. If you provide us with additional information, then we will update the analysis accordingly.

    I like to say that, after every RSDD engagement with me, the client is a better real estate professional. You grow with me. You can’t help but learn when we engage in the due diligence process.

  8. Will your conclusions be guaranteed?

    No. Due diligence is not insurance; it is due diligence. I will be assigning a numerical percentage of likelihood to my conclusions, which will never be 100% (because laws change and documents can be incorrect, etc.). I not a partner in your building, and the risk remains yours.

  9. What do you charge for Rent Stabilization Due Diligence?

    I generally charge a flat rate of $5k for 10 units or under. After that, I charge $500 per additional unit up to 20 units. After that, I charge $250/unit.

    Yes…you need me to look at the empty and/or free market apartments (i.e. the ones seller is telling you are free market) just as much as you need me to look at the units that are Rent Stabilized. Dollars for doughnuts, at least half of the allegedly free-market units are not. Here is a link to my most recent article about Illegally Deregulated Rent Stabilized Apartments.

    The largest project I ever did had 160 units; that kind of project gets priced a little differently.

  10. There are services out there run by non-lawyers who claim to perform “due diligence” on the Rent Stabilized tenancies and they are WAY cheaper than what you charge Michelle. Why shouldn’t I use them?

    Go ahead.

  11. What items are needed to conduct a Rent Stabilization Due Diligence

    The list of things I need to conduct a Rent Stabilization Due Diligence is constantly evolving. I understand that it is unlikely that you will give me all of the below. The more information you do provide me with, however, the better the analysis will be.

    1. Contract of sale or proposed contract (if pre-closing).
    2. If the deal closed and there were escrows held at closing or any post-closing agreements regarding tenancies, I really need them.
    3. ALL current leases and their lease chains – for example: if the original lease was 10 years ago and there have been renewals every year since then – I need the original lease and all renewals and all riders attached to all parts of the lease.
    4. Any correspondence with tenants.
    5. The DHCR Rent Roll Registration Printout for the entire building going back to 1984.
    6. The DHCR Printout on cases, active and closed, for the building – this is called a “Cases By Building Report” - VERY important!
    7. If there were MCI’s (Major Capital Improvements) I need the DHCR orders that support them.
    8. If there were IAI’s (Individual Apartment Improvements) I need: (a) work orders (b) receipts marked paid (c) cancelled checks (d) affidavits from contractors (e) before and after pictures.
    9. The Painting Registry for the building.
    10. If a super is in an apartment, the written employment agreement.
    11. Full files on any litigation with tenants, past or present, at DHCR, in the Courts, or at any agency, or at least I would like a “Litigation List” – a list of cases with their courts and index nos.
    12. If there are violations, I need to know the status of clearing them
    13. If there is a certificate of occupancy NOT online with DOB, I need it.
    14. If there were recent tenant buyouts conducted by the last/current owner – I want the paperwork on the buyout.
    15. Investigator reports.
    16. Are there cameras in the building?
      • Where?
      • Were they set up by a private investigator or a camera firm?
      • Who is in charge of them?
      • How often do the overwrite themselves?
      • Motion sensitive or continuous?
    17. Last three checks every tenant paid with.
    18. If tenants get Section 8, I need the “HAP” contract, or if they receive any type of government subsidy, SCRIE, etc. I need the paperwork.
    19. Is there a Tenant Association? If so, I need whatever information is available on the TA.
    20. All J-51 and/or 421-a paperwork associated with the building, past or present.

  12. The seller will not give us access to the material; you would have to go look at it in their conference room. Is that ok?

    No. There is no price you can pay me to travel to look at the material.

    You MUST get me the source documents via a secure online DropBox.

    I do NOT travel to seller’s conference room to review dusty files. It’s 2019 people – have the secretary accurately scan everything and put it in DropBox.

  13. I am not sure you understand my goal here…

    Well I want to! In order to properly conduct a Rent Stabilization Due Diligence, I must know the client’s GOAL for the building. The following are examples of typical goals:

    • Run the building as a Rent Stabilized multifamily asset; raising the rent roll organically when the opportunities to do so present themselves – via all legal rent increases, including but not limited to NYC Rent Guidelines Board annual and vacancy increases, Individual Apartment Improvement increases, and Major Capital Improvement increases.
    • The building is part of a development site assemblage.
    • Owner wants to de-tenant the building, make significant building-wide improvements, and then bring tenants back into the building at a legally justifiable rents.

  14. Is it ever worthwhile to do Rent Stabilization Due Diligence on a small building? a building with less than six units?

    In the case of a two-unit building in Brooklyn, I am often engaged by transactional attorneys to make sure that the home is not actually subject to Rent Stabilization. There are a number of reasons that an under-six-unit building might be subject to Rent Stabilization, and in my practice, I see it all the time. Here are three reasons:

    • Receipt of a tax benefit, either presently or in the past.
    • The building is actually part of a horizontal multiple dwelling.
    • The number of units in the building. If a building was built before 1974 and contains six or more units, then the apartments therein are Rent Stabilized unless certain exceptions apply. Well-established appellate case law holds that this is so even if the building in question had less than six units in 1974, but subsequent to 1974, six units were created in the building – EVEN IF THOSE UNITS WERE ILLEGAL, EVEN IF THEY EMPTY, EVEN IF THEY WERE SUBSEQUENTLY REMOVED. Wilson v. One Ten Duane Street Realty Co., 123 A.D.2d 198 (1st dep’t 1987).

  15. I need something a little different – can you look at my building and make sure that I have properly done Substantial Rehabilitation? Or will you guide me through the Substantial Rehabilitation process?

    This is a sub-product of Rent Stabilization Due Diligence, which I am calling “Substantial Rehabilitation Analysis”. We analyze a building to see whether it qualifies as Substantial Rehabilitation, a Rent Stabilization term-of-art.

    There is an exemption from Rent Stabilization based upon Substantial Rehabilitation of a building built before 1974, governed by Rent Stabilization Code § 2527.11 and § 2520.11(e) and by DHCR Operational Bulletin 95-2, which sets forth the position of the DHCR regarding the circumstances under which the agency will find that a building has been substantially rehabilitated. In general, for substantial rehabilitation a landlord needs to be able to prove that:

    • When the construction project commenced the building was in substandard and seriously deteriorated condition and the Building was at least eighty percent (80%) vacant of residential tenants.
    • All of the walls, floors, and ceilings: .
      • in the common areas must be replaced and
      • in the apartments must be replaced or made as new.
    • • One-hundred percent (100%) of more than 75% of the applicable Building-wide apartment systems contained on the list in DHCR Operational Bulletin 95-2 at I(A) have been completely replaced with new systems.
    • • All Building systems comply with all applicable building codes and requirements.

    This all needs to be proven by admissible and highly detailed proof. Litigating a Substantial Rehabilitation case is like litigating construction litigation. Therefore, this topic requires a highly specialized analysis.

  16. May I see a sample Rent Stabilization Due Diligence Analysis?
  17. I wish you had a service like this for tenants!

    I do! I do have a service like this for tenants! http://www.itkowitz.com/rent-stabilization-coverage-analysis-for-tenants

    I get multiple inquiries from tenants who want to know if they are Rent Stabilized. There are very few places for tenants to find accurate and actionable answers to their questions. I am such a place. Therefore, I created Rent Stabilization Coverage Analysis for Tenants. It is the same high-level service I offer to landlords with my Rent Stabilization Due Diligence Analysis, but this is designed for tenants and delivered at a flat rate price.

    If tenant is likely Rent Stabilized, she has different options for enforcing her rights. Some options are faster than others; some cost more than others; some are more aggressive than others. In general, tenant has the options of: going to DHCR; withholding rent, getting sued, and playing the situation out in Housing Court; suing for a declaratory judgment in Supreme Court; or doing nothing. In the Rent Stabilization Coverage Analysis I will cover separately the pros, cons, costs, time frames, and risks of each in detail.