DHCR Arbitrarily Ruled That Buildings Not Subject to Sub Rehab Exemption

In 2021, new landlord filed five applications with the DHCR, seeking a declaration that each building in a five-building complex was exempt from rent stabilization as the result of substantial rehabilitation of the complex formerly known as the Mohawk Hotel by prior landlord. The DRA ruled against landlord, noting that the buildings were rehabbed under the NYC Urban Development Action Area Project (UDAAP) on vacant city-owned buildings, and that the rehab was accomplished by means of a government loan made under the city's Participation Loan Program for the purpose of housing persons and families of low income. The DRA ruled that this precluded the deregulation of the building based on substantial rehabilitation.

Landlord appealed and lost. The DHCR again ruled that, even if Participation Loan Program funds weren't used in purchasing the building, it was clearly developed for the public purpose of providing low-income housing and therefore not subject to sub rehab exemption. Landlord then filed an Article 78 court proceeding,and argued that the DHCR's decision was arbitrary and unreasonable.

The court ruled for landlord, finding that the DHCR's ruling was not rationally grounded in law and fact, but was instead arbitrary and capricious. The court sent the case back to the DHCR to determine whether the buildings qualified for regulatory exemption under the Rent Stabilization Law based on substantial rehabilitation. The DHCR had relied on a 1985 Land Disposition Agreement (LDA) between the City of New York and prior landlord, who had then purchased the vacant and dilapidated property from the city. But the court ruled that the buildings can be subject to rent stabilization based only on the application of statutory provisions of the RSL. There is no provision in the RSL or any other law requiring rent stabilization coverage purely upon representations in a LDA. If the buildings were substantially rehabilitated after Jan. 1, 1974, they would be exempt from regulation under the Rent Stabilization Law.

5523 Wash. Ave & St. James Brooklyn LLC v. DHCR: Index No. 509298/23, 2023 NY Slip Op 34606(U)(Sup. Ct. Kings; 12/27/23; Montelione, J)