RENT STABILIZATION UNDER THE J51 TAX BENEFIT PROGRAM: SEGMENT 1

GENESIS OF THE J51 TAX BENEFIT PROGRAM

In 1955, the New York State Legislature enacted Real Property Tax Law (RPTL) § 489, which authorized cities to promulgate local laws that would provide tax incentives to multiple dwelling owners for rehabilitating their properties or converting them from commercial to residential use.  The legislature’s intent was to encourage an increase in the creation of affordable and safe housing.

New York City followed the state legislature’s lead in enacting Administrative Code (Admin. C.) § J51-2.5, now codified as Admin. C. § 11-243, et seq.  The statute contains what has become more commonly known as the “J51” program.  The J51 program incentivizes building owners to renovate their properties by giving them property tax benefits.  There are two elements of tax benefits: (1) an exemption from annual increases in the property’s assessed taxable value; and, (2) an abatement of the annual property tax assessment for the covered property.

rent stabilization as a quid pro quo for TAX subsidization

As a condition of receiving the tax benefits, a sort of quid pro quo, the J51 program mandates that owner of buildings that receive such benefits may only continue to take advantage of the tax subsidization if all of the dwelling units in the covered building are subject to the Rent Stabilization Law, Rent Control Law, or Private Housing Finance Law for the entire tax benefit period.  Over recent years, dispute arose between tenants and owners regarding whether units that became subject to rent stabilization by virtue of the J51 program could be “luxury” deregulated during the J51 period.  As set forth in greater detail below, owners have unequivocally lost that argument.

            The issue of what happens after the tax benefits expire is a bit trickier.  Buildings that were already subject to rent stabilization on another basis when the tax benefits began are unaffected by the expiration of such benefits—rent stabilization will continue on that other basis after and despite the expiration of the J51 tax benefit period. 

For dwellings that become rent stabilized solely as a result of the tax benefits, they will continue to be rent stabilized after the expiration of the benefit period unless (and this is a BIG UNLESS) the landlord complies with certain statutorily required notice provisions: the initial lease, and all renewal leases, must contain a prominent notice, in twelve point type, informing the tenant that the unit shall become deregulated upon the expiration of such benefits, and of the approximate date that the tax benefits are set to expire.  Absent strict compliance with this statutorily required notice provision, a unit that became subject to rent stabilization solely as a result of the building’s receipt of J51 benefits, will continue to be subject to rent stabilization even after the expiration of such benefits.

the impact of J51 on luxury deregulation of rent stabilized units

            Recently, an ambiguity in the J51 statute that owners relied upon to deregulate units was resolved by the New York State Court of Appeals, the state’s highest court.  The case was called Roberts v. Tishman Speyer Properties, L.P., and involved the enormous Peter Cooper/Stuyvesant Town Complex in Manhattan.  The ambiguity language in the J51 statute that the Court had to deal with, and which would have a substantial impact on the stock of rent stabilized housing throughout New York City, was the phrase “by virtue of.”  But first, a little background.

            Under the Rent Stabilization Law, there are provisions for high-rent and high income deregulation of rent stabilized units that is commonly known as “luxury” deregulation.  A rent stabilized unit can be “luxury” deregulated (1) if it becomes vacant and has a legal registered rent of $2,000.00 at the time of the vacancy; or, (2) if, for two consecutive years, it has a rent of at least $2,000.00 per month and is occupied by persons who have an annual adjusted gross income of $175,000.00.

            There is, however, an exception from luxury deregulation for units that become subject to rent stabilization under the J51 tax benefit program.  Section 26-504.1 of the Rent Stabilization Law states that luxury deregulation does not apply to units that become rent stabilized “by virtue of” receiving J51 benefits.  Landlords throughout the city took advantage of this language, alleging that it meant solely by virtue of the receipt of J51 benefits.  They took the position that if the unit would have been regulated for any other reason in addition to the J51 benefits, the unit could be luxury deregulated.

            In Roberts v. Tishman Speyer, tenants challenged the owners’ interpretation, and the Court of Appeals ultimately resolved the issue of whether “by virtue of,” means “solely by virtue of.”  Current and former tenants of the Peter Cooper Village/Stuyvesant Town Complex sued their landlord alleging that they had been improperly luxury deregulated because their buildings had received J51 tax benefits.  Their landlord countered, arguing that the receipt of J51 tax benefits did not exempt the tenants’ apartments from luxury deregulation because the exemption only applies where the receipt of J51 benefits is the sole reason for regulation.

            The Court of Appeals unequivocally rejected the landlord’s argument, holding that luxury deregulation is always inapplicable when a building receives J51 tax benefits; i.e., regardless of whether a unit would have been regulated for some other reason, it is exempt from luxury deregulation.  The Court reasoned that not only does the ordinary meaning of the phrase “by virtue of,” not mean that it is the single or only cause, but that as a matter of statutory interpretation, the RSL makes no distinction between whether the property was subject to rent stabilization solely due to the building’s receipt of J51 benefits, or for some other reason.

            The law of the land after Roberts v. Tishman Speyer is that a unit subject to rent stabilization by virtue of the landlord receiving J51 tax benefits, without regard to whether the unit would also be subject to regulation for some other reason, is exempt from luxury deregulation.

            The Court of Appeals left undecided a substantial issue, however: whether its decision should be applied retroactively.  Retroactive application could mean that (1) all of the apartments that had been deregulated would fall back into rent stabilization; (2) the rents for those apartments would be rolled back to their legal limits; (3) tenants who had been overcharged would be entitled to repayment of the amount that they were overcharged rent; and, (4) owners could be subject to treble damages (three times the total amount of their rent overcharge) for willfully overcharging their tenants.  Owners of buildings receiving J51 benefits therefore held out hope that the lower court, to which the Court of Appeals remanded this very issue, would hold that the decision was prospective.