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L & Tea Time with Michelle: Episode 2

Topic: Recovering Legal Fees
Guest: Michael Vinocur, Building Equity Management – MCI

MMI: Welcome to Landlords TV, brought to you by LandlordsNY. This is L & Tea Time with Michelle, the show where you get to have a cup of tea with me, Michelle Maratto Itkowitz, and we discuss an area of law that I have been practicing in in New York City for over 20 years, and that is landlord and tenant litigation, and we also have as guests some of the top real estate professionals in New York City. Today I am truly honored to have Michael Vinocur with us, and Michael has been in the real estate industry for over 10 years.

M: 2000 we started.

MMI: Michael has an MBA from Yale. I just wanted to put that in because I think that’s very impressive. His company is Building Equity Management, and your portfolio is mostly residential, mostly stabilized, mostly Manhattan, some you own, some you're third-party management, and you go as low as Little Italy, and you go up to Washington Heights… do I have that correct?

M: Yes, that’s correct.

MMI: And you’re very busy.

M: Yes, and I have other businesses as well, so I am very busy. Management is a 24/7 business -- luckily, we’ve stayed geographically constrained to Manhattan.

MMI: Did you do that on purpose?

M: Yes, because you’d have to be on trains 2 hours back and forth to Brooklyn.

MMI: And you’re very hands-on. You’re very high-tech, which frees you up to be very hands-on, to walk your buildings and know your tenants.

M: Yes, we leverage our time, and try to be efficient. We use technology where we can, but it still comes down to the physical building and to the administrative side of the business. Those are the two core components of the business.

MMI: So let me ask you this because this is what I think a lot of our membership really wants to know. You’re going in to manage a lot of buildings that really nobody has had their hands on in a while, so where do you start when you’re really approaching a building trying to add value?

M: Well, there’s a handful of obvious things to look at. Generally, we’re talking in those buildings that have pretty high rent-regulated components still, so there’s upside, and that’s generally why we’ll have bought the building or the person we’re managing will have bought the building.

MMI: You’d do a lot of due diligence ahead of time.

M: Well, you assume the worst. The only real due diligence that I do is I look if there’s every been previous MCI’s because part of our strategy, and MCI’s a Major Capital Improvement that allows a landlord, if it’s qualifying according to the rules of the DHCR that basically allows you to raise the rents by 1/84th of the improvement, which is in essence a 7-year amortization of your expense. So, if you have a building that’s entirely rent-regulated and below market, if you do the math that comes out to a 14% return on your money. If you’re borrowing from the bank at 3.5%, you would do that all day long. So, that’s a key part of our strategy is always as many major capital improvements that fit within this law that haven’t been done before. The reason you need to keep bringing this in as you do due diligence is that DHCR has useful life tables on various components of your building: the roof, the windows, the doors, the boiler, the electrical, the plumbing... if an MCI has been filed within that useful life, they’re not going to let you file another one now because there would be an incentive for landlords with deep pockets just to do these over and over again and snowball the rents up, so DHCR is onto that. If you’re going this route and you’re not familiar with MCI's these laws, I would recommend going to the DHCR website, there’s bulletins.

MMI: It’s very informative. You said to me off-camera, if you’re going to read the DHCR website, you need to get a bottle of wine, it needs to be at night, you need to sit and read. There’s a tremendous amount of information.

M: It requires discipline, but if you want to look at MCI’s, which we’ve just discussed, if you’ve got rent-controlled tenants, you’re insane not to file for what’s called an MBR -- it stands for Maximum Base Rent. It’s done in a two year cycling -- the filing -- but once approved, and once you get the hang of it, you get 7.5% increases every year, which beats what you’re getting on your stabilized apartments, and it’s generally more than what you’re getting on your market-rate apartments. The only caveat is you have to remove 80% of the prior-year HPD violations, and I think all of the C violations, which the first time is a little bit of work, but you want to get rid of those things to have a nice clean building anyway. The financial cost of doing so is rewarded because you’re getting a 7.5% increase. On MCI’s also with rent-controlled apartments, if you do enough of them, you can get 15% a year, so all of a sudden you’re in a situation where the rent-controlled unit in a building where you’re reinvesting, you can get 22% annual increases in rent. It doesn’t take that long for a $250 rent to grow to a $750 rent.

MMI: It’s funny how you said when we were off-camera, when I first asked you the question, how are you adding value? And you said, “Oh, it’s not rocket science!”

M: You need to know how to take advantage of the few bones they give you within the rent-regulation law.

MMI: Right. It seems like you’re maximizing every opportunity you have.

M: I’m not alone. Plenty of people have figured this out, but you have to dig. It doesn’t just come to you, or you have to hire a consultant. So there’s things like that. You can do an MCI to get a new boiler or to convert from oil to gas. That’s the biggest no-brainer in the business. If anybody still has a building that’s running on oil, then either their head's in the sand, or they just don’t have the financial resources to do the improvement because you can increase the rents for the cost of the improvement, plus you’re reducing your fuel costs probably 40%. So, every one of our buildings we’ve converted.

MMI: It’s excellent stuff, and really that’s just the tip of the iceberg. We could talk about this all day, but could you just hang out for a moment, and we’re going to move into the landlord and tenant teaching portion of our program where today we’re going to be talking about things very similar to this, in the sense of keeping your paperwork in good order and having all your ducks in a row, so you can be well set-up for your landlord and tenant case. We’ll catch you after.

Teaching Segment

MMI: Ok so, what we’re talking about are things that a landlord can do prior to bringing a landlord-and-tenant case: things that they can think about to make sure that their building and tenancies are in good shape, so that when you go to do your L&T case, it will be a good sound case. I often like to say that landlord-and-tenant cases are won or lost before they’re even filed, and that’s because of details like we’re about to talk about now. So, for instance, the deed. I like to see a case where the name of the owner on the deed is the same as the name of the owner on the lease. So, if Joe is on the deed, Joe is the landlord on the lease, but a lot of times you don’t have that. A lot of times the reason you don’t have that -- let’s say you have Joe on the deed, and Mary’s on the lease -- well that might be because Mary used to own the building, and made a lease with the tenant, and then she sold the building to Joe, so that’s now why you have a deed with Joe and you have a lease with Mary. That’s ok because what I am going to ask you for, as your landlord-and-tenant lawyer, is the assignment of rents and leases that happened at the closing. I’m sure your transactional attorney did an assignment of rents and leases, giving all those leases from Mary to Joe. But, let’s say you can’t put your hands on that, let’s say you can’t find it, let’s say maybe it just didn’t get done. We’re still ok because Real Property Law 232 says that all of the leases are deemed assigned by virtue of the transfer, so we’re probably still ok. Where we run into a problem is if Joe comes into my office, and Joe says, “Oh, I own this building. Do a Rent Demand for me.” “Ok, fine.” Let’s say that I’m not thorough, and I don’t check the deed online on ACRIS. I don’t check it, then I just bring the Rent Demand in the name of Joe, then I bring the Petition in the name of Joe, then we go into court, and we can’t settle it. We’re gonna do a trial. I’m getting my certified copy of the deed, and I look, and the name is Mary, and I say, “Wait a minute Joe, I thought you owned this, who’s Mary?” Joe says, “Oh, Mary’s my mother. The building is in my mother’s name.” I don’t even know what that means. I don’t know why he did it. The point is there’s the disconnect that I now have to figure out how to deal with. Thankfully, there is appellate case law that says that the name of the landlord on the lease can be the instrument pursuant to which I say the landlord has standing to bring that case. I don’t love using it though because not all of the judges are so familiar with it. There’s 1,052 new landlord-and-tenant cases filed in New York City every day that the court is open on average. The judges are busy, and I don’t want to bother them with my first department case and my long explanation that’s a long story about Joe and Mary. I’d rather just have this tight. These are the kinds of things that you can be thinking about ahead of time as a landlord, making sure that when you lease out the building, you’re leasing it in the name of the entity that currently owns the building. So, maybe you just changed from a partnership to an LLC in the course of a refinance. When you do new leases, don’t keep putting the name of the partnership, just put the LLC. It just makes life a lot easier.

MMI: Michael, thank you for sticking around.

M: Thank you for having me. That was very instructive.

MMI: I hope you join us again in the future.

M: It’s a pleasure.

MMI: Thank you for watching L & Tea Time with Michelle, on Landlords TV.

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