Owners facing 4 more years of rent controls.

The bi-annual rent regulation dance has been resolved for four more years, but industry representatives were disappointed more owners will not benefit sooner.

The four-year provision "is the worst part of the bill," said Dan Margulies, executive director of the Community Housing Improvement Program (CHIP).

Industry experts bemoaned the fact that luxury decontrol was given to those owners who rent units for more than $2,000 to tenants who make $250,000 while tenants with the same $250,000 income or more were permitted to keep leasing apartments for less than $2,000.

Other changes included vacancy decontrol for Westchester, Rockland and Nassau's 20,000 co-op and condo units; a retention of the 1/40 recoupment regulation; and the elimination of treble damages when the sole problem is absence of registration. The legislature also authorized the formation of a study group to determine the need for changes to the laws for the next go round.

Marolyn Davenport, vice president of government affairs at the Real Estate Board of New York, said they think it is an important, symbolic step and shows that the legislature recognizes they must begin to restructure the rent regulations.

"There's a real concern it's not enough to stimulate private investment into either construction or housing stock," she complained. "The goal of reform was to do that."

According to the Division of Housing and Community Renewal (DHCR) records of owner's registration cards, about 11,000 units rent for more than $2,000 in Manhattan alone. The statewide total is probably close to 12,000, said spokesperson Lee Hudson.

The Rent Stabilization Association's Director of Research Jack Freund believes some brownstones will be touched as well as newer luxury properties. "It will affect a range of owners," he added. Other estimates at the number of units affected are ranging from 4,000 up to 13,000. An Assembly spokesperson estimated 77 buildings will be helped.

Margulies noted the new law will make it possible to straighten out registration errors without enormous penalties where there was no overcharge. He was also pleased that the owners are guaranteed the 1/40 increased for individual apartment improvements. "There is no doubt that following this acrimonious negotiation the governor would have yanked that by regulation," he explained.

Retaining the 1/40 was an industry priority from the moment DHCR Commissioner Angelo Aponte had announced he wanted to amend the rent hike to 1/72 of the cost of improvements at an Owners Advisory Council meeting early this year.

Co-ops & Condos Get Help

The most significant effects will be in the counties surrounding New York City where co-op and condominium owners were at the mercy of their tenants. Those owners and sponsors who kept units vacant will be able to rent them immediately without fear of controls.

The law also incorporates the case law ruling New York City, Gary Rosenberg, Esq. of Rosenberg & Estis.

Robert E. Herman, counsel to the Apartment Owners Advisory Council of Westchester and a former state rent commissioner and administrator, said the provision will make available several thousand units for rental in Westchester.

These units have been kept off the market because, under the old law, they would be tied up forever under the Emergency Tenant Protection Act (ETPA). "It will be quite a spur to the supply of housing here in Westchester," he said.

The new measure also could spur price increases since vacant units are now salable to investors who can rent them for what the market will bear and sell them when appropriate. "It will make the financial structure of co-ops more secure." Herman explained, "because with vacant units you are always facing arrears and carrying charges. It will make it far more attractive to lending institutions because these units will be rentable in the true sense of the word."

"What it does prove is that the legislature can't treat the general public the way it treats "landlords," Margulies observed. "The general public became |landlords' and they wouldn't take it.

Hilary H. Becker, CPM, president of Becker Real Estate Services, Inc. and the Greater New York Chapter of the Institute of Real Estate Management owns and manages some co-ops on Long Island. "Vacancy decontrol is long overdue," he said adding that the value of the units will also rise.

Where units have been rented in those counties in communities that have adopted the Emergency Tenant Protection Act and not yet modified it to exclude either owner or investor apartments, the owners will have to wait, however, until those units become vacant to avail themselves of the market rental freedoms. "Keeping tenants in place is one of the things that the Assembly insisted on," said Senate spokesperson Chris McKenna. "We had to swallow some things."

Many suburban communities had been changing the laws to exempt owner-occupied units, explained Martin A. Shlufman, a Garden City, Long Island, attorney who is former deputy counsel to DHCR, and represents the Apartment House Council of the Long Island Builder's Institute. Now, he noted, it will be up to the co-ops and condos to spearhead efforts to decontrol those tenants already in place.

Becker believes there should have been some way of addressing the issue for owners that have current tenants in place whose rentals are not covering actual costs.

Treble Damages Out

Many other suburban unit owners had been charging rents that just covered their mortgage and maintenance payments and were later hit with overcharges under the ETPA rules. As individuals, they were also unaware of the rules of the game.

Shlufman is representing one individual unit owner in Cedarhurst who is appealing a treble damage overcharge order to refund $38,000 to a tenant. "She never filed an owner's registration statement," he said. Shlufman was hopeful the new law, wherein treble damages cannot be assessed if the only problem was a lack of registration, would be to her benefit.

No Relief for Small Owners

Freund said they were pleased that the legislature has finally recognized rent regulations are a subsidy and shouldn't be given to everybody. The RSA is disappointed, however, the legislature did not provide any concrete relief to the rental housing industry especially to the smaller owners, he observed, "who are on the brink of collapse."

He called the bill's decontrol criteria imperfectly enacted. "It makes no sense that everybody earning less than a quarter of a million deserves rent subsidies. It makes no sense to take it away for someone making a quarter of a million dollars and paying $2,000 but not for someone paying $750."

"That's silly," agreed Joel Herskowitz director of the rental division of Lawrence Properties.

Margulies noted the Assembly insisted on protecting those people, "proving again they are the bad guys. The Assembly now stands exposed as nincompoops because they decided people who earn $250,000 and pay $600 need to be protected and people who earn $250,000 and are paying $2,000 don't."

The law also does not account for units whose rents reach $2,000 after this Oct. 1. "If it reaches $2,000 after that you are out of luck," said Rosenberg. "The theory is that you need a new survey later to show the need."

Allan Goldfarb, a principal of Goldfarb Properties, which owns buildings throughout the metropolitan area, said while a few of their units might be affected he didn't think this law will have much of an impact. "The real inequity occurs when they pay less than $2,000," he noted. "They could be making that [$250,000] and paying less. If they are paying over $2,000 it's not such an inequity."

Leora Magier, house counsel at Harlington Realty, which owns 20 buildings around the city, observed that in most cases, those units renting for $2,000 are already renting at market rents. Removing them from the protective laws, she noted, "is only a plus in the paperwork and complaint area."

One director of management at a large luxury residential firm said he didn't expect many units to be affected "unless you can divine with a crystal ball who has an income of $250,000."

Procedures

The owners will be provided with forms by DHCR in May of 1994 and give them to those tenants whose apartments are renting for $2,000 by Oct. 1, 1993. The tenants will check off whether or not their income is $250,000.

That information could be verified by DHCR against New York State income tax returns but will be based on the Federal adjusted gross income reported for two years straight. Owners will need to provide the information to DHCR by June 30 but an order of decontrol would not be effective until the end of such lease.

"This procedure is the greatest fairy-tail," said attorney Rosenberg. "It will be mindboggling. You file this thing, the tenant responds, DHCR sends it to Finance. Finance sends it back. It takes DHCR seven weeks to docket an application today, how are they are they going to meet these time frames?"

While the management director called $250,000 a "nice number," he said "$100,000 is a nicer number."

The original proposal by the Senate, where household income of $100,000 would have decontrolled the apartment was closer to the mark, Freund agreed. The legislature should have enacted a vacancy decontrol provision, he added, that would have phased out the controls without affecting any existing tenants.

Just The Beginning

Herskowitz agreed these are just early inroads into destabilization. "Political football being what it is, this is round one," he said. There are many units, he observed, that are stabilized where the rent being charged is much less than the actual stabilized rent because of high turnover.

Margulies agreed the political "dynamic" including an outpouring of support from editorial boards for owners accounted for the first minor changes in the law in 10 years.

Richard Siegler, a partner with Stroock Stroock & Lavan, said the changes are positive for owners and a step in the direction of replacing rent control. "It's obviously got limited results but it shows the state and city are waking up to the problems of rent control."

As a former lobbyist for the elderly, Magier said she knew how hard it was to accomplish these small changes. "But it does nothing to stop the basic injustice. We have an intractable political problem."

Legal Issues

There are many legal questions that will be raised about what was done by the legislature in their haste to come to an agreement. The rent regulations are enacted under the basis of the "police powers," said an Assembly spokesperson. Margulies noted that usually refers to health and safety issues. "Here they have applied a means test and exposed the system for what it is, a subsidy system," he said.

Equal protection issues are being examined, as well as who should pay for the subsidy, now that it has become visible. "Does the landlord have the responsibility to bear that burden or does the taxpayer?," questioned Margulies.

Margulies observed the legislation has an unusual "separability" clause. This ensures that if any provision is struck down by the courts the other provisions of the measure and associated laws will survive - even if one provision makes the system itself unconstitutional - and only that one provision will be nuilified.

"You don't strike down an entire law because of a single added provision but it makes it clear you can't challenge it," noted Rosenberg. "There will be thoughts every which way as to how to attack the income limits. If you want to challenge it, they are saying, you lose what you got.'"

"The luxury decontrol piece raises constitutional issues and the legislature anticipated those with this unique separability clause," Margulies explained. "We will obviously be consulting attorneys."

Without having seen the new legislation and without knowing of the new separability clause, Scott E. Mollen, a partner in Graubard Mollen Horowitz Pomeranz & Shapiro, suggested there could be a possibility of a Constitutional argument against the system. Until now, he observed, the attacks on rent control have been consistently unsuccessful although the Supreme Court has yet to rule on the validity of New York City's vacancy emergency numbers.

"It would not surprise me if changes in the framework spur new attacks on rent stabilization in view of the current and new composition of the [Supreme] Court," he said.

Added Rosenberg: "It's great for the industry. It's good in concept, but not in substance. The draftsmanship leaves a lot to be desired."

Major Provisions

of Extension Bill

Decontrols co-ops and condosin Rockland, Westchester and Nassau upon vacancy

Decontrols units renting for $2,000 or more upon vacancy

Where all renters or sublessors in the unit have total gross income of more than $250,000 for two consecutive years, and the units are renting for $2,000 or more as of Oct. 1, 1993, the unit is decontrolled upon expiration of the lease after DHCR issues such an order

Maintains the 1/40 payback provision for substantial modification or increase in the services or dwelling space or furniture and fixtures

No treble damages based solely on failure to file a proper or timely rent registration statement

Late registration penalty of 50 percent of the fee if no overcharge

Creates a study commission to report by June 30, 1995