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Stuyvesant Town, Atlantic Yards, and the Road to Hell

Two major commercial real estate disputes have been winding their way through New York’s court system. In both cases, a municipality intervenes in the free market, ostensibly for the greater good of the community. Unfortunately, those well-meaning intentions end up doing more harm than good – especially when accepted rules are either discarded or rewritten.

First, New York State’s highest court ruled 4-2 last week that the owners of Manhattan’s Stuyvesant Town and Peter Cooper Village, the most expensive apartment complex in American history, could not simultaneously receive certain tax benefits and free up units from rent regulation. Second, home and business owners on the site of Brooklyn’s Atlantic Yards argued their case before New York’s Court of Appeals. The According to the plaintiffs, the State of New York, by way of the Empire State Development Corporation, illegally blighted their properties under the doctrine of eminent domain for the benefit of a private developer. At first glance, the results appear diametrically opposed: the “little guy” won in the former, while the “big guy” will likely win in the latter. In both cases, whim and caprice carried the day over due process.

The new owners of Stuyvesant Town had expected, among other things, to make capital improvements. They would then pass along those costs to their tenants in the form of rent increases. The City of New York even incentivized this strategy under its J-51 program, by providing tax abatements. Stuyvesant Town was one such J-51 beneficiary.

The Division of Housing and Community Renewal (DHCR), a New York City agency responsible for supervising affordable housing in New York State, issued an advisory opinion in April, 2000, that owners whose buildings were rent regulated solely because they received these J-51 benefits could not remove units from rent regulation. If, however, they received J-51 benefits, and the units were rent regulated for other reasons not related to the J-51 program, then the owners were free to remove units from rent regulation once they exceeded a monthly rent of $2,000.  The DHCR drew this conclusion from their reading of applicable rent regulation legislation from 1993.

The majority in the Stuyvesant Town decision explicitly recognized that the State Legislature’s nine year silence in response to the DHCR’s decision can constitute acquiescence. Nevertheless, the majority held that “there is no indication that” this issue, and the DHCR’s ruling “had been brought to the Legislature’s attention.” The dissent was livid at that fanciful inference: “As plaintiffs themselves put it, ‘[b]attles over rent stabilization are among the fiercest in Albany…[I]t is inconceivable that the Legislature did not know what was afoot…” (The majority ignored the fact that the New York State Assembly has passed a battery of onerous rent regulations every year in recent memory, while the State Senate has opted not to pass it along.) The court’s minority cited to a 1989 case in which the DHCR construed a rent regulation statute in a particular way.  There, the Court of Appeals deemed the Legislature’s subsequent silence as acquiescence.

The purchasers of Stuyvesant Town have been accused of many things. Some of those critiques are perfectly valid. One unfair criticism, however, is that they should have known not to remove units from rent regulation once they surpassed the $2,000 threshold. The rules of the game were changed very late in the game. Harsher critics would say that they were changed retroactively.

Since New York’s highest court ruled on the legality of a state law, it will be extremely difficult to get a hearing before the U.S. Supreme Court. Federal courts defer to state courts on interpreting local law. Tishman Speyer Properties, the owners of Stuyvesant Town, will have to argue that a federal right of theirs has been violated. Their best chance appears to be under the Fourteenth Amendment: No state shall “deprive any person of life, liberty, or property, without due process of law.” (This is especially ironic since civil rights activists pressured then owner MetLife to desegregate the privately owned housing under the same doctrine in 1952.) Not only was money taken, but also the additional value that their property would otherwise have, but for this decision. In the words of legendary, disbarred mouthpiece Roy Cohn, “Don’t tell me what the law is. Tell me who the judge is.” In this case, the judges are Scalia, Thomas, Alito, and Roberts. It only takes four Justices to grant a writ to hear a case…

The Atlantic Yards matter, by contrast, has not yet been decided by New York’s Court of Appeals. The ambitious project, spearheaded by private developer Forest City Ratner, plans for a sporting arena, 16 mixed-use commercial and residential buildings, including affordable housing, together with public open space. In order to clear the way – literally – for the project, New York State condemned occupied properties in the immediate area.  Under the eminent domain doctrine, a municipality can take private properties after compensation, so long as the properties are put to “public use.” The 2005 Supreme Court case of Kelo v. City of New London greatly expanded the Court’s understanding of what constitutes “public use.” Plaintiffs’ properties in Atlantic Yards, like plaintiff Kelo’s house, are in otherwise good condition. Their only “sin” is that they are located within a development area. The Court in Kelo reiterated that a municipality may not take property under the pretext of a public purpose, when its actual purpose was to bestow a private benefit. (Speaking of private benefits, the proposed Atlantic Yards arena in Brooklyn will cost the city nearly $40 million, according to New York City’s Independent Budget Office. By contrast, the developer stands to receive $726 million worth of public benefits for the project.)

Atlantic Yards project was supposed to provide 2,250 units of affordable public housing, a slam-dunk for meeting the requirements of “public use.” Records recently released under the Freedom of Information Act reveal that Forest City need only seek funding through subsidies for affordable housing. If the developer cannot secure this money, he is under no obligation to build the proposed number of units. There is no guarantee that the project will include any affordable housing. As a result, the public open space alone (and certainly not the arena, which charges admission) might not meet the relatively higher threshold for “public use,” as defined by New York State’s constitution.

As the rules for J-51 seem to have changed midstream, so too were the applicable guidelines for Atlantic Yards. When New York City’s Metropolitan Transportation Authority sold the development site to Forest City Ratner, the Public Authorities Accountability Act of 2005 required the M.T.A. to secure an independent appraisal, and solicit multiple good faith offers for the property. The M.T.A. did neither.

If New York’s Court of Appeals broadly interprets New York’s own “fair use” doctrine, then plaintiffs in the Atlantic Yards case will have to seek relief from the U.S. Supreme Court as well. Besides claiming that the project is not public use, they will also have to argue, like the owners of Stuyvesant Town, that their property rights were also deprived of due process.

Both rent regulation and eminent domain require the precision of surgeons. The results, however, all too often reflect the precision of blind circus strongmen with sledgehammers. Well-intentioned bureaucrats and judges should be encouraged to work for the greater good, so long as they follow ethical and accepted guidelines. While the homeowners in Atlantic Yards and the owners of Stuyvesant Town may think they have nothing in common, they both have more in common than they, or their respective supporters, would care to admit.

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