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Tenants Take the Hit as New York Fails to Police Huge Housing Tax Break

Top developer Two Trees Management overcharged renters for years – but still cashed in on $10 million in tax cuts the city never officially approved.

When prominent New York developer Jed Walentas asked the city to approve a set of sleek towers on Brooklyn’s industrial waterfront last year, he pitched his company as a player that always abides by the rules.

The project, remaking the old Domino Sugar factory into a 2,300-unit apartment and office complex, would be the biggest ever for his firm, Two Trees Management. As with earlier projects, Two Trees would get millions in tax breaks in return for capping rents and reserving some units for low-income tenants.

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“We’ve done everything we always said we were going to do in every one of these projects,” Walentas assured the City Council at a public hearing last year.

City lawmakers signed off on the deal, and Mayor Bill de Blasio touted the use of public subsidies to create more affordable housing as a model for the future.

Another signature Two Trees project, however, stands as a model of something else: The failure of city and state regulators to effectively police the tax break at the heart of such deals and hold developers to their word.

An investigation by ProPublica into one of Two Trees’ major developments in downtown Brooklyn shows that regulators stood by as the company flouted laws requiring rent stabilization in exchange for a large property tax break it received.

Despite that requirement, the firm promptly told regulators that most of the apartments were exempt from rent stabilization when the complex at 125 Court Street opened in 2005. Then, over the next eight years, Two Trees repeatedly exceeded city limits on rent increases in the 321-unit luxury building, even overcharging the majority of its low-income renters.

Regulators took no action until 2011. Although they eventually informed Two Trees that it was out of compliance, they never moved to revoke the tax benefit.

In fact, they had never approved it in the first place.

In response to questions by ProPublica, city officials confirmed that 125 Court Street has yet to officially qualify for the tax break program, known as 421-a, even though Two Trees has received more than $10 million in tax savings that continue to this day.

ProPublica’s analysis of rent histories, meanwhile, shows that the building’s original tenants were charged at least $368,000 in excess rents. Two Trees confirmed that it had imposed “accidental” overcharges in the building’s early years, but said it later repaid tenants almost $300,000 plus interest.

Together, the overcharges and Two Trees’ lack of final approval show a city that is eager to give out tax breaks but loathe to police them, enabling developers to easily sidestep tenant protections under its single-biggest housing subsidy.

Long controversial, the 421-a program is now on the brink of an historic expansion. Under a deal brokered in Albany last summer, the $1.1 billion-a-year program would allow developers to claim longer tax breaks in exchange for providing more low-income apartments.

For the first time, the revamped law also would exempt most new apartments built with 421-a subsidies from rent stabilization.

Critics of the reforms have called them a giveaway that will ultimately push up rents, but there’s been little attention paid to the program’s regulatory shortcomings.

The city maintains that it is the state’s job to make sure tenants in 421-a buildings aren’t charged higher rents than the law allows. The state says it’s up to the city to administer and enforce the program. The result: A regulatory dead zone.

Jed Walentas, the CEO of Two Trees Management, at The New York Observer's 100 Most Powerful People in New York Real Estate event in 2011. (Chance Yeh/Sipa via AP)

“Tenants are the only ones expected to do anything to enforce the law,” said Ellen Davidson, a tenant lawyer with the Legal Aid Society.

ProPublica began investigating 421-a this year after discovering that some landlords getting the tax break had overcharged tenants who didn’t realize their apartments in high-end buildings like 125 Court Street were rent-stabilized.

Subsequently, an analysis of city and state data showed that landlords had failed to register 50,000 apartments for rent stabilization, as required by law, yet continued to receive more than $100 million in 421-a and other tax benefits.

Regulators have recently busted some smaller landlords for ducking rent stabilization. But the history of 125 Court Street raises further questions, including why a landlord that violated rent limits for so long didn’t lose the tax benefits, and whether developers with compliance problems should qualify for new 421-a deals.

Neither Two Trees nor city officials were able to explain why the building still had no final certificate of 421-a eligibility a decade after tenants began moving in.

A spokesman at BerlinRosen, the public relations firm representing Two Trees, called it an “administrative oversight” that is being corrected.

Officials at the city’s Department of Housing Preservation and Development (HPD), which decides eligibility for 421-a, said they are “confident that the building will complete the necessary paperwork or the city will begin the revocation process.”

This account relies on rent records, leases and hundreds of pages of documents Two Trees has produced in court, as well as materials longtime tenants obtained via public records requests.

ProPublica also interviewed tenants, housing advocates and attorneys who are expert in rent-stabilization law. All five lawyers who reviewed leases and other documents agreed that Two Trees had violated the law. Based on the records, three described the city’s enforcement as “toothless.”

“Who’s watching the store?” said Phil DePaolo, a housing activist who opposed the Domino Sugar deal. “Nobody.”

Nine years after her husband died from cancer, Nancy Sher decided it was time to move. Sher, mother to twin girls, wanted something smaller than the family’s old townhouse in Brooklyn’s Prospect-Lefferts Gardens neighborhood.

A brand new building was coming to market on the edge of downtown Brooklyn not far away. “My children picked it,” Sher said of 125 Court Street. “We drove by it every time we drove to school.”

The 11-story complex had stores at the street level and housed a YMCA with membership deals for residents. One-fifth of the units in 125 Court Street were reserved for low-income tenants. The rest could be leased at market rates, but all of the building’s apartments were supposed to be subject to limits on rent increases set each year by the city’s Rent Guidelines Board.

By the time Sher moved, in May 2005, Two Trees was established as one of the city’s most successful developers. Under Jed Walentas’ father, David, the company was best known for transforming blocks of factories and warehouses near the Manhattan and Brooklyn bridges into the upscale Dumbo neighborhood.

Tax subsidies similar to 421-a helped the company redevelop those properties. As Two Trees planned 125 Court Street, David and Jed Walentas applied for more tax benefits that explicitly obligated their firm to abide by rent-stabilization rules.

The Two Trees complex at 125 Court Street has received more than $10 million in city tax breaks that is has not yet qualified to receive. (Bryan Anselm for ProPublica)

After buying the land from the city for $16.5 million in 2003, David Walentas signed papers with the city’s Housing Development Corporation agreeing that “all units in the Project are subject to Rent Stabilization” as a result of its expected 421-a tax break.

The agency sold $92.7 million in tax-exempt bonds to fund a loan to Two Trees in December 2003, enough to cover more than 90 percent of the project’s costs. The bonds’ tax-exempt status made the loan more affordable.

A year later, in December 2004, Two Trees applied for 421-a benefits. In the two-stage process, developers get up to three years of tax breaks during construction. They then have to apply again to get final, post-construction benefits for up to 25 years.

Jed Walentas signed the first application, including an affidavit stating in capital letters that if owners failed to comply with 421-a rules, the city “SHALL REVOKE THE CERTIFICATION OF ELIGIBILITY AND TERMINATE THE TAX EXEMPTION.”

As part of the process, HPD uses a formula to calculate a maximum monthly rent that can be charged for the building — in this case, $1.15 million. The formula, written into the law, affords developers wide leeway to propose initial rents that are far in excess of what the market will bear.

In March of 2005, HPD approved a rent schedule listing $6,698 per month as the maximum initial rent for Sher’s two-bedroom unit. When Sher leased the apartment two months later, however, Two Trees listed a “legal” rent of $9,175, along with a $3,540 “preferential” rent — the amount she would actually pay.

A “temporary rent concession” rider in her lease stipulated that Two Trees reserved the right to someday withdraw the discount and charge the maximum.

Sher didn’t pay close attention at the time. But city officials and housing lawyers have said such leases are improper: Under rent stabilization rules, the amount actually “charged and paid” becomes the legal rent for an original tenant.

That figure, $3,540 in Sher’s case, sets the starting rent for future increases. “They had no legal basis for reporting the ‘legal’ rent as $9,175,” said Nicholas Moccia, a Staten Island lawyer who represents tenants and landlords and who reviewed Sher’s lease for ProPublica. “That’s a number they pulled out of thin air.”

Landlords are required by law to register all their units with the state Department of Housing and Community Renewal (DHCR) each year, reporting how much rent is paid and whether they are rent stabilized. Yet when Two Trees first filed for 125 Court Street, it listed Sher’s and 255 other units as “exempt,” records show.

As their leases came up for renewal, Sher and other tenants began seeing steep increases. Two Trees imposed a 10 percent increase in a new two-year lease for Sher’s apartment in 2007. The most then allowed by the city’s Rent Guidelines Board was 6.75 percent over two years.

When the lease for Yolande Nicholson, another original tenant, came up for renewal the same year, Two Trees imposed a 22 percent increase, or more than triple the 6.75 percent limit. Her rent went up by $643 a month.

Nicholson, a securities lawyer, hadn’t looked closely at her lease. “I did not know in any way that it was rent-stabilized,” she said.

Tenant Yolande Nicholson was evicted from 125 Court Street last year. Two Trees Management once raised her rent by 22 percent, triple what was allowed under rent stabilization. (Bryan Anselm for ProPublica)

Two years later, Two Trees raised her rent another 20 percent — more than double the city limit of 8 percent at the time. Nicholson tried to negotiate for something less, then refused to sign a lease. She said she wrote to David Walentas asking for a rent reduction but never received a response.

Sher and Nicholson were in high-end apartments. But records show that Two Trees also overcharged tenants in most of the building’s 64 low-income units. These units have reduced rents and are for people earning less than 50 percent of the median income for New York City, or $43,150 for a family of four.

Katrece Small won a lottery for one of these units and leased a studio for $398 per month beginning in 2005. Records show that Two Trees raised her rent by 8.2 percent and 10.7 percent in 2007 and 2009, respectively, when the limits were 6.75 percent and 8 percent for two-year leases.

From 2005 through 2013, records show, Small was charged more than $1,000 in rent she shouldn’t have owed. Like others, Small, a single mom who is out of work, said she didn’t really pay close attention to the terms of her lease.

“I didn’t know what it meant,” Small said. “It’s still not even clear. I don’t even know if I’m paying the legal amount of rent.”

In all, ProPublica estimated that at least 43 of the 64 original low-income tenants at 125 Court Street were overcharged a total of $80,000. Additionally, 47 original tenants in market-rate units were charged about $288,000 more than what city limits allowed.

ProPublica calculated the figures by comparing changes in annual rents for the building’s initial tenants against applicable Rent Guidelines Board caps. In nearly 200 lease renewals, Two Trees charged more than was allowed by the board.

Two Trees said it discovered overcharges in a 2013 audit. A spokesman said in a statement that the firm ultimately issued rent refunds or credits totaling $299,148, plus $90,805 in interest, to 80 tenants covering all overcharges since the building opened.

Sher provided a document confirming that she was among those reimbursed, but Nicholson said she was never compensated. Two Trees said it had credited both Small and Nicholson.

Nicholson said she became convinced something was awry with rents in 2010. She eventually spent a full day scrutinizing rent-stabilization statutes, which proved daunting even compared to the labyrinthine securities laws she dealt with in finance.

She shared her suspicions with Sher; now the two are among a handful of tenants involved in a tangle of lawsuits with Two Trees over rent increases and other complaints, including mold, water damage and dislocated floorboards.

Nicholson refused to pay rent increases she felt were excessive and was evicted last year. Sher went on a rent strike; she narrowly avoided eviction last month after a judge required her to set aside $95,000 in back rent to keep her legal case alive. The judge did allow her a discount for mold.

As overcharges mounted at 125 Court Street, regulators were slow to check up on the building.

Six years after it opened, the city asked why Two Trees claimed the apartments were exempt from rent stabilization. “All units must be registered as rent-stabilized,” HPD said in a June 14, 2011 notice to the company’s lawyer. “256 units are currently listed as ‘exempt,’ ” it said. “This is not allowed.”

HPD also said the rents reported by Two Trees were too high and urged it to get into compliance — without listing any consequences if the firm didn’t.

Almost a full year later, on June 4, 2012, HPD wrote again with the same complaint: “Please revise your DHCR registration so the rents are within HPD guidelines & all units are rent stabilized.”

This time, the agency warned that unless Two Trees fixed the problems, it would stop processing its final application for the 421-a tax break. Two Trees by that point had already benefited from five years of a 25-year exemption.

Sher began her rent strike that year. Soon after, Two Trees sent a renewal lease raising her rent to $5,000 per month — a 35 percent increase when the city allowed only 7.25.

125 Court Street tenant Nancy Sher has complained about water damage that has caused her floorboards to buckle. (Bryan Anselm for ProPublica)

She and nine other tenants then sued Two Trees in April 2012. One of those tenants was Jeff Goodman. In 2013, Two Trees boosted the rent on his one-bedroom by 47 percent to what it claimed was a legal maximum of $6,599.40.

“I remember that the first words that came out of my mouth were, ‘This must be in retaliation,’ ” Goodman said.

Asked about retaliation, Two Trees said it believed all its rent increases were legal at the time. In September 2013, however, it filed corrected rents with the state, reducing some that were too high, including Sher’s.

The city’s HPD said it did not investigate rents at 125 Court Street or other 421-a buildings because it’s the state’s job to enforce rent-stabilization laws.

DHCR, the state regulator, said it has received four complaints of overcharges at the building. Records obtained by ProPublica show that in one instance — over Two Trees’ protests — the agency awarded triple damages to an elderly low-income tenant who had complained.

It is unclear whether the complaints triggered a broader review of rents at 125 Court Street; DHCR would not say. In an email, the agency described its role as that of a “regulatory agency — not an enforcement entity.” The 421-a program, it said, “is administered and enforced” by the city’s HPD.

By the time Two Trees corrected its rents, the initial construction-period tax exemption for 125 Court Street had long expired. When ProPublica asked for the final eligibility certificate, HPD officials divulged that they never issued one.

Blaine Schwadel, a lawyer at Rosenberg & Estis who frequently represents landlords on 421-a issues, said that obtaining a final certificate is not simply a formality. “That is when HPD has its chance to review things” before greenlighting final tax benefits, he said.

This year, 125 Court Street’s property tax break amounts to $1.4 million, a nearly 90 percent reduction. It may not be the only 421-a building that is benefiting without final approval.

Officials at HPD said that under a “flawed system,” the city has long allowed construction-period tax benefits to automatically continue even if final eligibility isn’t confirmed. That will change under the new 421-a law, which says projects can’t start getting the tax break until construction is over and they have qualified.

Ed King, a lawyer representing Nicholson and Goodman, called state and city oversight of the 421-a program a “colossal failure.”

By spring 2014, Sher and Nicholson were busy writing to de Blasio, Attorney General Eric Schneiderman and senior officials at city and state housing agencies, asking them to investigate Two Trees. Only Schneiderman’s office responded, though merely by acknowledging receipt of Sher’s letter.

Jed Walentas, meanwhile, was busy making his final pitch to city officials for the Domino Sugar redevelopment, including an integral 421-a tax break.

Sher and Walentas crossed paths at the marathon City Council hearing on April Fool’s Day 2014, at which Walentas said Two Trees had kept all its promises.

“I can tell you that without 421-a, there won’t be any affordable housing built here,” Walentas said as council members peppered him with questions about the number of low-income units he planned at the Domino site.

Waiting for their turn to testify near the end of the six-hour meeting were Sher, Nicholson, Goodman and Small.

“I’m here today to request that the City Council suspend any further concessions or taxpayer subsidies to Two Trees because they have proven unworthy of the public trust,” said Sher.

The Two Trees plan sailed through the City Council on a 47–0 vote the following month. Council members even sweetened the Domino deal by agreeing to provide access to tax-exempt financing, as the city had done for 125 Court Street.

The deal allowed de Blasio to claim a win because Two Trees agreed to include 40 more lower-income units than the 660 originally planned for the complex.

Two Trees vs. Two Tenants

With his Domino Sugar development on the line, Two Trees CEO Jed Walentas faced off with tenants at a hearing last year.

‘We’ve lived up to every single commitment that we’ve made’

Jed Walentas, CEO, Two Trees Management

‘We just don’t feel they have earned the public trust’

Nancy Sher, tenant at 125 Court Street in Brooklyn

‘They violate and mock the rent-stabilization laws’

Jeff Goodman, tenant at 125 Court Street in Brooklyn

Achieving the goals in de Blasio’s housing plan — which include building 80,000 new lower-income units over a decade — will require cutting many similar 421-a deals. The legislature’s expansion of the program, expected to be finalized in January, contains many provisions proposed directly by the mayor’s office.

Under the revised program, developers could collect 421-a benefits for up to 35 years instead of the current 25, but new 421-a buildings would have to include more lower-income apartments than are now required, up to 30 percent. Income limits also would be lifted, opening these rent-stabilized units to wealthier tenants.

Perhaps the biggest change is that new units renting for more than $2,700 a month would no longer have to be rent-stabilized — freeing 421-a landlords from Rent Guidelines Board limits for the first time since the program began in 1971.

That shift effectively sets a floor for market-rate apartments, tenant advocates say, and undermines a major court victory tenants won in 2009. In the case, Roberts v. Tishman Speyer, judges ruled that apartments getting similar tax breaks can’t be removed from rent stabilization because the rent gets too high.

With rents rapidly rising above $2,700 in many neighborhoods, the new law “categorizes thousands of middle-class tenants as undeserving of rent stabilization,” said Seth Miller, a tenant lawyer with Collins, Dobkin & Miller in Manhattan.

“Why should developers get to charge any rent they want for most of the apartments the taxpayers pay for?” he said.

Buildings that are already getting 421-a benefits, like 125 Court Street, would remain rent-stabilized. The new law doesn’t address whether a developer’s past compliance should be evaluated when awarding future benefits.

“If enforcement were automatic and prompt, you wouldn’t need to blacklist developers from getting future benefits,” Miller said.

De Blasio spokesman Wiley Norvell said problems with the 421-a program are “a decades-old issue” and that reforms the mayor proposed, including changes in the application process, would “ensure owners meet requirements before any benefits are issued.”

Real estate interests have made clear they are fans of the mayor’s plan.

Both developers and labor unions with a stake in construction jobs have given generously to Campaign for One New York, a nonprofit formed to advocate for de Blasio’s political priorities, including affordable housing.

In April, a $100,000 gift came in to the mayor’s fund, which is also represented by BerlinRosen, the Two Trees PR firm.

The source? A Two Trees subsidiary named for a Domino Sugar address: 316 Kent Ave.

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