Dive Brief:

• A group of 29 New York City landlords has agreed to pay $4 million total amid allegations from the New York attorney general that they were involved in an illegal kickback scheme by the management companies they employed to deregulate hundreds of rent-stabilized apartments in New York City. The settlement was with apartment owners affiliated with Sentinel Real Estate Corp. for wrongdoing committed by employees at the now-defunct property management firms the owners used: Newcastle Realty Services and Highcastle Management, according to a press release from the attorney general’s office.
• Newcastle and Highcastle inflated and falsely stated renovation costs for rent-stabilized Brooklyn and Manhattan apartments in an attempt to deregulate them, the attorney general said.
• In addition, their employees accepted more than $1 million in kickbacks from contractors in exchange for hiring them on renovation jobs, according to Attorney General Letitia James, who noted that the owners failed to provide sufficient oversight of the property management firms’ practices. Although Sentinel Real Estate Corp. is affiliated with the settling landlords, it is not a party to the settlement agreement.

Dive Insight:

Prior to June 2019, if New York City apartment 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. Some property owners and landlords used IAIs to increase rents enough to bring them over the deregulation threshold established by those laws, thereby converting them to market-rate units and maximizing the buildings’ market values.

The owners involved in this settlement utilized a similar investment strategy, James said, and Newcastle and Highcastle helped them carry it out by falsifying the costs of IAIs. Newcastle and Highcastle allocated construction expenses among units to achieve deregulation, inflated costs for renovation jobs and included the kickbacks they received from contractors in the charges reported for certain units.

As part of their scheme, Newcastle and Highcastle would intentionally set the cost of labor for a renovation project to be equivalent to the amount necessary to deregulate that particular unit, regardless of the quote provided by the contractor, according to court documents.

In multiple instances where labor costs were not sufficient to deregulate a unit through the IAI system, Newcastle and Highcastle would create false orders on a contractor’s letterhead stating more work was required for an additional cost. The contractors in these scenarios did not actually have more work to do, nor did they request more money, but Newcastle and Highcastle needed to report that a higher amount had been spent to deregulate the unit.

In exchange for awarding repeated renovation jobs to certain contractors, Newcastle and Highcastle employees received more than $1 million in kickbacks from contractors in exchange for being awarded jobs at the owners’ buildings, the court documents said.

A spokesperson for the landlords said the 29 owners have fully cooperated in the investigation and said they were also victims of scheme.

“When the allegations were brought to our attention by the NYAG, we fully cooperated with her office’s investigation, conducted our own internal review with the assistance of outside counsel and promptly severed ties with the third-party property manager,” according to a statement from the spokesperson shared with Multifamily Dive. “In addition, we voluntarily implemented additional third-party cost verification measures and other enhancements to our already robust compliance policies and procedures.”

Resolution

The owners will pay $4 million to a city affordable housing fund and also must engage 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 to reset legal rents, offer rent stabilized leases and refund current tenants for overcharges, as necessary. Finally, the owners must implement new institutional practices to ensure legally compliant ownership and management of rent-regulated apartments.

“Our rent stabilization laws exist to protect the rights and homes of New York tenants, and this deregulation scheme proves they exist for good reason,” said James in the release. “Newcastle and Highcastle made themselves millionaires while kicking hundreds of rent-stabilized apartments off the market, all while under the lax oversight of these property owners.”

In a case also related to rent costs, Chicago-based multifamily owner and operator Equity Residential was ordered to pay a total of $2 million to the District of Columbia and to residents of a 625-unit Washington, D.C., apartment complex this summer for misrepresenting rent costs at the building.

The district’s attorney general alleged that Equity Residential misled tenants by advertising apartments for a monthly rent that included an undisclosed concession, then raised the rent at lease renewal based on the actual rent listed on the lease. In some cases, tenants’ rents jumped by thousands of dollars per month in the rent-controlled building, according to a press release from District of Columbia Attorney General Karl A. Racine that called the practice a “rent hike scam.”

This story has been updated to include a response from the owners’ spokesperson.