A.G. Schneiderman Announces Settlement Requiring Developer That Operated Illegal Hotel To Pay Back Nearly $4.5 Million In Improper Tax Benefits

Manhattan Developer Received Tax Exemptions Under 421-A Program While Operating Building as an Illegal Extended-Stay Hotel

Deal Requires Developer to Return All Residential Units to Rent Stabilization, Repay $4,446,153 in Tax Benefits to City and $275,000 in Costs to State

Schneiderman: My Office is Working to Enforce the Prerequisites for 421-a Tax Exemptions

NEW YORK – Attorney General Eric T. Schneiderman today announced that his office has reached a settlement with 47 East 34th Street (NY), LP, the owners of an apartment building located at 47 East 34th Street in Manhattan, to repay $4,446,153 in unpaid taxes due to the City under Section 421-a of the New York Real Property Tax Law and convert all 110 units of the building to rent-stabilized units. Prior to the Attorney General’s investigation, the building was operating as an illegal extended-stay hotel, which is not permitted under 421-a rules. The settlement brings the building into compliance with New York City’s 421-a program and ensures that tenants will receive rent-stabilized leases for the first time ever.

“I will not allow the 421-a tax exemption to line the pockets of the rich and powerful,” Attorney General Schneiderman said. “The 421-a program provides massive tax benefits to developers in exchange for permanent housing development, and I will continue to make sure that the prerequisites for receiving those benefits are enforced. I am pleased that this company has agreed to do the right thing by paying the City back taxes and offering more than 100 rent-stabilized leases to New Yorkers. My office will continue to crack down on illegal development that exacerbates the City’s severe affordable housing shortage.”

“The Attorney General’s aggressive action here is deeply appreciated,” said New York City Mayor Bill de Blasio. “We must protect the affordable housing we have, and ensure the resources we spend maximize the number of new affordable homes for New Yorkers in need. We won’t tolerate this kind of abuse.”

“I thank the Attorney General for his diligence on this case and for his continued partnership in our mission to protect the city’s housing stock and tenants,” said New York City Housing and Preservation Development (HPD) Commissioner Vicki Been. “Today’s announcement sends a clear message that building owners must comply with their legal obligations and will be held accountable when they fail to do so. This settlement will ensure that millions of dollars are recovered and put to good use funding affordable housing.”

"It is unacceptable for a landlord to turn a tax-exempted affordable housing unit into a short term rental that commands higher profit margins,” said New York City Public Advocate Letitia James. “There is dire lack of affordable housing in New York City – tonight over 50,000 New Yorkers will have no place to call home. Meanwhile, building owners like this are unlawfully converting much-need affordable units into lucrative short-term businesses. I commend Attorney General Schneiderman for today's settlement and his ongoing work to return affordable housing to New Yorkers.”

“Taxpayers deserve to know that their hard-earned dollars are being spent to promote affordable housing, not line the pockets of illegal hoteliers,” said New York City Comptroller Scott Stringer. “The settlement announced today by Attorney General Schneiderman will ensure that tax exemptions truly support that effort.”

“The tax benefits provided under the 421-a program are tied to the creation of new housing units for permanent residents, which our city sorely needs,” said Manhattan Borough President Gale A. Brewer. “When developers or landlords reap the reward of a massive 421-a tax break without providing housing units for actual permanent residents, they need to know they will be held accountable. I applaud Attorney General Schneiderman for sending that message today, loud and clear.”

“I am very pleased that Attorney General Schneiderman is taking on abuses in the 421-a program, which costs New York City over $1 billion each year while creating very little affordable housing,” said New York State Senator Elizabeth Krueger. “It is particularly egregious when a developer receives tax breaks meant for permanent housing for New Yorkers and uses them to operate an extended-stay hotel, lining his pockets at taxpayer expense. Today’s example should be kept in mind when the Legislature considers reforms to the 421a program later this year.”

“Thank you, Attorney General Eric Schneiderman, for the investigation and pursuit of the owners of 47 East 34th Street,” said New York State Assemblymember Richard Gottfried. “Not only have these unscrupulous landlords illegally violated the tax law by fraudulently using a 421-a tax exemption, an incentive program which was created to help owners to build affordable housing, but they then used this building as an illegal hotel, a clear violation of the rent stabilization laws. Forcing these owners to pay a $4.5 million financial settlement and giving the tenants rent-stabilized leases is a great victory for all New Yorkers. We must double our efforts to end the abuses of 421-a and the proliferation of illegal hotels by passing stronger housing laws and by increasing enforcement and the penalties for violations of these laws.”

“If 421-a tax benefits are given, it is essential, at a minimum, that tenants actually receive rent regulation status,” said Adriene Holder, attorney-in-charge in the Civil Practice Unit of The Legal Aid Society. “Thanks to the leadership of the Attorney General in uncovering this landlord fraud, tenants will be protected going forward and the tax benefits will be repaid.”

Section 421-a of the New York Real Property Tax Law grants valuable local property tax exemptions on certain new multi-family buildings. In order to qualify, Section 421-a requires that any project receiving the tax exemption be subject to local rent stabilization laws and in some cases requires them to either set aside a number of affordable housing units or pay service staff prevailing wages. Buildings that are owned as either a condominium or a cooperative are exempt from the rent regulation requirement. Buildings that are operated as hotels are not eligible for benefits under the 421-a program.

In the wake of the economic crisis of 2008 and its impact on the real estate market, the Attorney General has discovered that many sponsors of new condominium buildings chose to ride out the storm by illegally changing the use of their buildings from condominium to rental, or by converting to a hostel or hotel, while continuing to receive benefits under the 421-a program and failing to provide rent-stabilized leases, affordable units, and prevailing wages.

The Attorney General’s Office uncovered that 47 East 34th Street was one of the many buildings improperly receiving the 421-a tax exemption despite being out of compliance – operating as an extended-stay hotel instead of as a condominium or rental project.

Under the settlement obtained by Attorney General Schneiderman, the company will make required filings with the City’s Department of Housing Preservation and Development and the State’s Division of Housing & Community Renewal, and will convert the use of the building to a rent-stabilized apartment building. In addition, they have agreed to pay $4,446,153, to a special fund to help finance affordable housing for low-income New Yorkers. They will also pay the State of New York $275,000 to cover the costs of the Attorney General’s investigation.

This settlement is the most recent in a series of settlements the Attorney General has obtained in his ongoing investigation of properties receiving benefits under the 421-a program. Prior settlements have included repayments of tax benefits as well as restitution and remedies for building workers and tenants. Further information on those settlements can be found here.

The Attorney General thanks the New York State Division of Housing & Community Renewal and New York City Department of Housing Preservation and Development for their assistance on this matter.

The investigation of this matter was conducted by Assistant Attorneys General Elissa Rossi and Nicholas J. Minella, Deputy Chief Andrew H. Meier, Special Counsel Jeffrey R. Rendin and Bureau Chief Erica F. Buckley, all of the Real Estate Finance Bureau, as well as Executive Deputy Attorney General for Economic Justice Karla G. Sanchez.

A copy of today's agreement can be read here.

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