Series: The Rent Racket How landlords sidestep tenant protections in New York City.

In June 1995, a proposal to revitalize the ghostly New York neighborhood near Wall Street was poised to pass the state Senate. The bill offered developers multimillion-dollar tax breaks if they were willing to turn aging office buildings into apartments. Landlords, in turn, would agree to limit rent increases, a standard provision for such programs.

However, just hours before the Senate was scheduled to adjourn for the summer, Joseph L. Bruno, the Republican leader of the Senate, surprisingly slammed the brakes and pulled the bill off the calendar. He later said the reason was simple: He wanted time to consult New York City’s mayor, Rudolph Giuliani.

In the months that followed, ProPublica has found, a handful of Republicans maneuvered behind the scenes to radically undermine the rent-stabilization aspect of the program without actually rewriting the bill. They accomplished this goal through a novel approach: Giuliani wrote Bruno a letter in August declaring that the city’s intention was for the rent limits to apply only to tenants who paid less than $2,000 a month. Anyone else would have to pay market rates.

No one attempted to change the language of the bill, which had already been approved by the Assembly. It said apartments were to be “fully subject’’ to rent-stabilization laws

The debate was brief when the Senate finally met in October. Just before the vote, a Republican Senator asked to read Giuliani’s letter into the record. None of the Senators commented on its contents, and the bill passed 53—1.

The tax program — known as 421-g — spurred the creation of almost 10,000 rental units that helped transform lower Manhattan over the past 20 years. However, three out of every four units created under the program were never rent stabilized because the initial tenants paid more than $2,000 a month.

As rents have gone up, many more units have escaped stabilization as developers, their lawyers, and officials in state and city government have accepted Giuliani’s letter as the last word on how to interpret the 1995 law.

The state housing authority cited Giuliani when it concluded in 1997 that expensive apartments could be rented without restrictions. The city asked developers applying for benefits under the program identify their units as stabilized or exempt. When tenants raised questions, landlords showed them Giuliani’s letter.

Some legal experts say the law has been improperly applied for more than 20 years. “This is ridiculous. The city’s intention is irrelevant. Period,” said Eric Lane, the dean of Hofstra University’s law school. “You see what they were trying to do? They were trying to amend the bill passed by the Assembly by referring to letters that the Assembly never saw.”

The 421-g program expired in 2006 but many buildings still benefit from the tax break. Just last year, the program cost the city almost $75 million in lost tax revenue.

Recently, several dozen tenants in the neighborhood asked a judge to order landlords to refund what they say were massive rent overcharges. They argued that the Giuliani-Bruno exchange has been improperly used to undo the clear intent of New York lawmakers, which was to tie tax relief to rent limits.

They have the bill’s original sponsor on their side. Martin Connor, the then-Senate Minority Leader, told ProPublica in a recent interview: “That was clearly not my intent. This is like Republican nonsense here.”

But despite this, the tenants may face an uphill battle. Lawyers for landlords have pointed out that subsequent bills relating to tax subsidies do not mention 421-g among the list of tax breaks that must be accompanied by stabilized rents no matter how pricey. That omission, they argue, shows the Legislature always intended for 421-g to work differently from other similar programs.

“All of that counts not just for something, it counts for everything,” said Mitch Posilkin, general counsel at the Rent Stabilization Association, a landlord group that cheered Giuliani’s interpretation of the bill in 1995.

The courts are split. Six years ago, a housing judge ordered another landlord, Skyline Developers, to abide by limits on stabilized rents for all of its more than 300 units. But earlier this year, a different housing court judge reached the opposite result in a case involving developer UDR.

At least two cases involving such matters are currently pending in New York Supreme Court. In one, 46 tenants have sued Kibel Companies, asking that a judge compel the developer to provide them rent-stabilized leases. Lawyers for Kibel have said in court that the company received multiple assurances from city and state agencies that the rent limits would not apply if they rented the new apartments for more than $2,000.

Millions of dollars are at stake. Kibel’s lawyers have said that an adverse ruling would prohibit the company from refinancing or selling the buildings. “You’re going to invite humongous rollbacks in rent, and humongous overcharges because every building, every building that got 421-g is going to be liable for overcharges” Kibel’s counsel, Joseph Burden, said at a recent hearing.

Kibel has also enlisted the support of Giuliani, who submitted testimony last year on behalf of the developer. “One of the City’s and legislature’s concerns … was that burdening the newly converted residential units with rent regulation would offset the value of the tax benefits,” he wrote.

Kibel declined to comment. A spokesman for Giuliani said he had filed testimony because he was knowledgeable about 421-g and that he had not charged a fee for doing so. The spokesman did not answer further questions. Bruno did not respond to requests for comment submitted through a lawyer.

As it happens, those who stand to benefit from the court case are among the wealthiest renters in one of the city’s most expensive neighborhoods. Unlike subsequent real estate tax breaks created by the Legislature, which required a mix of luxury and low-income housing, 421-g was virtually all luxury apartments. That argues against providing the tenants any redress, landlords say.

“This situation seems to be a solution in search of a problem,” Posilkin said. “You have people who can afford to pay market rents of thousands of dollars a month who in no manner, shape or form should be able to benefit from stabilization.”

Joseph Bruno was famously opposed to rent regulation.

’’An atom bomb would have created less of a problem, literally,” he said once after promising to wipe out the rules.

Rent stabilization entitles tenants to renew their leases and limits how much their rent can be increased each year. In the case of tax breaks, those protections are in place only for the duration of the tax benefits. Rent limits have long been fought by landlords, who say they are unfairly restrictive, and by free-market advocates, who argue that they raise overall rents while providing benefits to a small minority of tenants, many of whom don’t need the help.

At the time Bruno derailed the vote on the Lower Manhattan bill, the Financial District had seen commercial tenants flee for years — either to Midtown or to neighboring states. In 1995, the vacancy rate for office buildings was around 20 percent. The assessed value of commercial buildings had dropped by 30 percent, significantly reducing tax revenue.

Bruno supported the bill but was worried that the legislation as approved by the Assembly would require all rents to be stabilized, according to an article published by the Real Estate Weekly in August 1995. “The senator feels strongly that rent stabilization and control is not the way to help the city’s economy,” Bruno’s chief of staff, Abraham Lackman, said of the bill after its delay. “That part of the bill is troubling.”

The timing was sensitive. The Senate had loosened the rules on rent stabilization two years earlier, lifting limits on apartments renting for more than $2,000. But there was one exception to this rule: Units built with help from tax breaks were to remain stabilized, regardless of how high their rents rose.

The landlord lobby was of the same mind as Bruno. “There is no place for rent regulation in an economic incentive program,” said Dan Marguiles, a president of one of the landlord groups, at the time.

Sometime that month, Bruno got in touch with Giuliani.

“In our discussion you asked that the legislation be amended,” Giuliani wrote back on August 16, summarizing what appears to be a previous exchange about the bill. Giuliani went on to say that he had consulted the “drafters of the legislation” and that it had always been “the City’s intention” to allow for expensive units to be exempt from rent stabilization.

Not a word of the bill was changed, however. Instead, Bruno wrote back to Giuliani asserting that the problem no longer existed.

“I am gratified that your intent comports with the Senate’s own reading of this legislation and I appreciate your willingness to clarify the issue,” Bruno wrote on August 31. “The Senate will pass this bill when it reconvenes in October.”

That same day, Bruno issued a public statement saying the bill could be brought to a vote.

“This was really an attempt to undermine the democratic process which is really poor in New York as it is,” Lane said of the letters. “Let me assure you that these shenanigans were ways to create a legislative record without going back and amending the bill.”

The bill came to the Senate floor on Oct. 12, 1995. Franz Leichter, the sole senator who voted against the bill, criticized the idea of giving tax benefits to otherwise profitable businesses. Leichter alluded to the deal that had been cut, noting that the rent limits would not last long. “This is going to rent inevitably well above $2,000 per month,” he said that day. “Under the rent laws, those buildings are not going to be controlled anyhow.”

Toward the end of the debate, Vincent Leibell, a Republican senator, asked for permission to read a letter from Giuliani. Leibell said he had also expressed concerns “regarding some provisions of the original bill.”

“I understand now that the Mayor has contacted us and cleared up this concern,” he said before reading the letter.

None of the senators said anything further about rent stabilization in the few minutes of debate that followed. Bruno closed the debate, also without mentioning rents or the letter addressed to him that had just been read.

Looking back, lawyers for tenants say they are mystified as to how a law could be turned upside down by a letter from New York City’s mayor.

“Giuliani didn’t draft the damn thing,” said Serge Joseph, a lawyer who has represented virtually all tenants involved in 421-g cases. “So why is Giuliani’s interpretation of a statute that hasn’t changed suddenly the final say?”

In response to its tenants’ lawsuit, Kibel has said it wouldn’t have acquired its property at 90 West Street if the company hadn’t been assured Guiliani’s interpretation would stand.

“If we thought that the units in the building would be subject to rent stabilization (but not high-rent deregulation) during the entire period the benefits were being received, we would likely not have purchased the building,” Lee Rosen, the managing agent for the Building, asserted in court papers.

The neo-gothic, 23-story former office building lies just south of the World Trade Center and was severely damaged when the towers collapsed on 9/11. Kibel purchased the building in 2002, spending over $100 million to buy and renovate it into 410 luxury rental units.

When the building opened in 2005, a third of the units rented for under $2,000 and were subject to rent limits.

As of last year — a testament to the revitalization of the Financial District — only eight units remain stabilized.

Rent Limits Just a Fiction for Thousands of NYC Tenants, Records Disclose Among other facts, newly released housing documents reveal that 239,000 regulated apartments have “preferential” rent, meaning landlords may be able to boost rents by more than what the city allows. Read the story.

Taylor West, a tenant, was served with a 33 percent rent increase last year. He attributed the change to new leasing officers, as well as the sense that the building’s tenants had become more transient — fewer families, more recent college graduates. West managed to convince other tenants to band together, contribute to a legal fund, and file a lawsuit against Kibel.

“Everybody was getting outrageous rent increases and I saw people being kicked out,” he said.

Thanks to 421-g, Kibel paid no property taxes on 90 West from its construction until 2015. Since then, it has paid a discounted amount. The developer has argued, however, that once the tax break expires, the expensive renovation it undertook means that it will end up paying more taxes in the long run than if it had never received the benefit.

Kibel has taken a hard line with two tenants at another building, 85 John Street, who raised 421-g’s rent stabilization guarantees with their leasing agent in hopes of reducing a 28 percent rent increase. A few days later, Kibel sued the tenants in order to have the courts decide whether their leases should be stabilized.

“I feel as though we are standing up for legislation we didn’t write,” said Joel Roodman, one of the tenants sued by Kibel. “We are defending it to an expense to ourselves.”

Roodman and West are represented by Joseph, the tenant lawyer.

Beyond filing the lawsuit, tenants said Kibel has also distributed fliers in their buildings and attached Giuliani’s letter. “Some believe that all units must be rent stabilized,” one flier says. “This is not the case.”