A.G. Uncovers Illegal Scheme to Deregulate Apartments

New York State Attorney General Letitia James recently announced that her office had secured $4 million from a group of 29 New York City landlords after uncovering an illegal kickback scheme by the management companies they employed to deregulate hundreds of rent-stabilized apartments in New York City. Most of the buildings were either in Upper Manhattan or in Brooklyn, mainly in Flatbush and Brighton Beach.

The context: Prior to June of 2019 with the passage of the Housing Stability and Tenant Protection Act, if owners made improvements to rent-stabilized units, they could increase the rent of those units by a fraction of the cost of the improvements that were made, through a system known as Individual Apartment Improvements. If the rents rose enough to bring them over the deregulation threshold established by rent stabilization laws, owners could convert the rent-regulated units to market-rate units.

The owners in the settlement had used now-defunct property management firms Newcastle Realty Services, LLC (Newcastle) and Highcastle Management, LLC (Highcastle). These management firms inflated and falsely stated renovation costs for rent-stabilized apartments in an attempt to deregulate them, and their employees accepted more than $1 million in kickbacks from contractors in exchange for hiring them on renovation jobs. Newcastle and Highcastle, in addition to inflating costs for renovation jobs, included the kickbacks they received from contractors in the charges reported for certain units.

The bottom line: The owners failed to provide sufficient oversight of the management firm’s practices. As a result, as part of the settlement, the owners paid $4 million to Attorney General James’ Affordable Housing Fund with the New York City Department of Housing Preservation and Development (HPD), which preserves and expands affordable housing in New York City. They have also engaged an independent auditor to evaluate the regulated status and legal regulated rents of the apartments previously managed by Newcastle and Highcastle.

Following completion of the auditor’s evaluation, the owners will follow protocols set forth by the attorney general’s office to reset legal rents, offer rent stabilized leases, and refund current tenants for overcharges, as necessary.