West Village Houses: Units Ruled Not Stabilized Despite Receipt of J-51 Benefits

The history of the buildings can be divided into three parts. From construction through June 25, 2004, the buildings were subject to rent regulation under Article II of the Private Housing Finance Law (PHFL), known as the Mitchell-Lama program. From June 25, 2004 — when the buildings left the Mitchell-Lama program — through March 9, 2006, rents at the buildings were regulated by an HDC regulatory agreement made pursuant to PHFL Article XII.

On March 9, 2006, the buildings converted a tenant-sponsored cooperative under PHFL Article XI. The offering plan acknowledged the issue of whether buildings' receipt of J-51 benefits made the buildings stabilized, but did not resolve that issue. Due to said uncertainty, the sponsor agreed, for a 12 year period ending in March of 2018, to treat non-purchasing tenants as if they were subject to rent stabilization.

In 2006, following the cooperative conversion, various tenants who elected not to purchase under the tenant-sponsored cooperative plan commenced a declaratory judgment action, asserting that they were rent-stabilized based on the building's receipt of J-51 benefits. The case lay fallow for approximately a decade, but was revived in 2016. In 2017, shortly before the 12-year "rent-stabilized" period would end, both parties moved for summary judgment as to the issue of rent regulatory status. On Oct. 19, 2018, Justice Jaffe granted summary judgment to the holder of unsold shares.

The Court first held that the buildings' initial receipt of J-51 benefits in 2001, while the buildings were subject to Mitchell-Lama regulation, did not cause the occupied unsold units to become rent-stabilized. The J-51 statute, Administrative Code §11-243, contains a so-called rent regulatory quid pro quo, stating that buildings receiving J-51 benefits must be subject to some form of rent regulation. One of the enumerated rent regulatory systems, however, is a regulation under the PHFL, which includes buildings under the Mitchell-Lama program (PHFL Article II). HPD's J-51 regulations, 28 RCNY §5-03(f), are to the same effect. In addition, §26-504(1)(b) of the Rent Stabilization Law specifically exempts from stabilization buildings subject to regulation under the PHFL. As the Court concluded, "thus, as long as the building is subject to an enumerated rent regulatory scheme, it may receive J-51 benefits without triggering the RSL."

The Court used the same analysis for the period from 2004 to 2006, when the buildings left Mitchell-Lama program and became subject to an HDC regulatory agreement made pursuant to PHFL Article XII.

The Court then addressed the post-2006 period, when the building converted to a tenant-sponsored cooperative under PHFL Article XI. The Court observed that RSL § 26-504(a) expressly states that rent stabilization shall not apply to dwelling units in buildings "owned as a cooperative or as a condominium." See, Fed. Home Mortgage Corp. v New York State Div. of Hous. & Community Renewal, 807 NY2d 325, 333 (1994) ("the RSL provides in clear terms that a building otherwise eligible for rent stabilization is exempt from such regulation if 'owned as a cooperative'").

The Court next addressed the tenants' claim that in any event, they were rent-stabilized by virtue of GBL §352-eeee(c)(2)(iii). That section states that non-purchasing tenants under a non-eviction plan remain subject to whatever governmental protection they previously had. The Court observed, however, that such protection does not apply to a PHFL Article XI tenant-sponsored cooperative:

"GBL §§352-eeee(1)(a) and (b) define 'plan' as not including an offering plan for a co-op conversion pursuant to article II, VII, or XI of the PHFL. As WVH was converted to a co-op pursuant to article XI of the PHFL, the non-purchasing tenants are not entitled to have their rent regulations, if any, continue thereafter."

The tenants lastly argued that the buildings were rent stabilized pursuant to PHFL § 654-d(18), which makes subject to rent stabilization buildings financed by loans insured by the Real Estate Mortgage Insurance Corporation (REMIC). The holder of unsold shares established, through REMIC annual reports for the years in question, that the loan used to finance West Village Houses had never been insured by REMIC.

Practitioners should recognize that the J-51 run regulatory quid pro quo can be satisfied by rent regulatory schemes other than rent stabilization, and does not apply where a building has been converted to a cooperative. Accordingly, practitioners should carefully review the regulatory history of the building, both before and after the receipt of J-51 benefits, to determine whether such benefits made the apartments therein rent-stabilized, whether for a first or second time.

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Jeffrey Turkel, a member of this newsletter's Board of Editors, is a member of the Manhattan real estate law firm of Rosenberg & Estis, P.C. Mr. Turkel represented the prevailing holder of unsold shares in West Village Houses Renters Union v WVH Hous. Dev. Fund.