Letitia James Aims to Silence Woody Pascal, REBNY

In her quest to return free-market apartments in 31 buildings to rent stabilization, New York Attorney General Letitia James is trying to gag a whistleblower and the real estate industry.

The whistleblower, former state housing official Woody Pascal, had made a sworn statement that was temporarily sealed by a judge in July on James’ request. Peak Capital Advisors, which rehabilitated and deregulated the 31 buildings, sees Pascal’s statement as crucial to saving the $150 million investment. It could also help protect other firms’ projects from huge rent rollbacks.

David Gomez and Alex Rabin of Peak Capital Advisors

To get it unsealed, Peak’s lawyers removed every sentence to which James objected. But when they moved to resubmit it, her office didn’t budge, telling a judge that Peak had “no legitimate reason” to file it.

The reason couldn’t be more obvious: Pascal detailed how his former agency began rejecting substantial rehabilitations in response to pressure from tenant activists and politicians, reversing longstanding policy. Peak and other firms had relied on that 1995 policy to rehab buildings with rent-stabilized units and re-rent them at market rates.

James also asked the court to stop the Real Estate Board of New York from intervening in support of Peak, but Judge Kathy King gave REBNY the green light.

REBNY plans to submit a 21-page brief that explains the damage that would result from throwing fully renovated buildings back into rent stabilization — not just to Peak (run by David Gomez and Alex Rabin) and its investors and lenders, but to countless other sub-rehab participants and to the city’s housing stock. Buildings sub-rehabbed since 1994 have about 12,000 units.

“This case presents a question of significant, industry-wide consequence: whether the state may apply a novel interpretation of the substantial rehabilitation exemption … to transactions completed years before that interpretation existed,” lawyers Kara Schechter Rakowski and Anthony Morreale wrote for REBNY.

The two Belkin Burden Goldman attorneys dismantled the state’s claims that mere occupancy by tenants, or buyouts to get them to leave, indicate a building was not substandard.

Belkin Burden Goldman lawyers Anthony Morreale and Kara Schechter Rakowski

“That a tenant resides in an apartment with antiquated wiring, failing plumbing, or inadequate fire separation does not mean the apartment is not in ‘seriously deteriorated’ physical condition,” they argued. “It means the tenant may have no realistic alternative, emotional ties to an apartment, or a statutory right to remain.”

Buyouts, they noted, reflect future value after renovation and deregulation, not current condition. Even tenants in burned-out apartments demand buyouts.

The whole point of allowing deregulation of substantially rehabilitated buildings is that otherwise there’s no financial rationale to fix them. That’s why the state created the exception in 1974 and clarified it in 1995.

Although Peak met the terms of the policy by gut-rehabbing buildings that were at least 80 percent vacant, Pascal’s former agency, the Division of Homes and Community Renewal, ruled the properties were habitable and thus not seriously deteriorated. Peak had not asked the agency for preliminary approval, which was optional but became more frequently sought by developers as state politics turned against them.

Sub-rehabs are a niche of the real estate industry but are becoming increasingly important as below-inflation rent increases and the state’s Housing Stability and Tenant Protection Act of 2019 push buildings into disrepair. Mayor Zohran Mamdani’s rent freeze and violation blitz will accelerate the trend.

Tenant activists believe the affordability crisis justifies the state’s stepped-up efforts to keep units rent-stabilized.

But if capping the rents of decrepit units results in perpetual vacancy, it only makes the housing crisis worse by reducing supply. It’s like letting meat spoil during a famine, then offering it to soup kitchens at a discount.

The state’s unannounced about-face, REBNY’s brief explains, is “an unexplained departure from decades of settled administrative practice, rests on analytically unsound reasoning, constitutes an unpromulgated rule … and imposes severe, retroactive consequences on an industry that reasonably relied on the prior standard.”

Other than that, it’s wonderful.