A group of crooked landlords and property owners has been tagged by the New York State Attorney General for their illegal management practices that defrauded millions of dollars from programs set up to improve the lives of citizens. The state’s highest lawyer states that almost 30 companies also bribed and received kickbacks from contractors and will now have to pay.
On Tuesday, Aug. 23, Attorney General Letitia James, the first Black woman to serve in this capacity for the Empire State, announced her office has secured $4 million from 29 New York City landlords after exposing a kickback scheme by various employees of firms hired to manage their properties. These individuals, according to the Brooklyn Eagle, were expressly hired to deregulate hundreds of rent-stabilized apartments throughout two of the city’s five boroughs.
Rome Sentinel reports that in May 2019, the Office of the Attorney General filed a lawsuit against David Drumheller for participating in this elaborate scheme. Through discovery around the lawsuit, the agency determined the owners failed to detect or stop the illegal practices from happening.
The complaint was issued against the 29 LLCs (the owners) affiliated with Sentinel Real Estate Corporation and settled the suit for $4 million, compensation for the crimes committed by employees from Newcastle Realty Services, LLC (Newcastle) and Highcastle Management, LLC (Highcastle).
Newcastle and Highcastle inflated and falsely stated renovation costs from rent-stabilized apartment units, doing so to try to have them deregulated. During this time, workers from the two companies accepted more than $1 million in kickbacks from contractors, shaving off money in exchange for awarding them the bids to renovate the properties.
The companies exploited the Individual Apartment Improvement laws, recently changed in June 2019, that allowed owners to incrementally increase rent for rent-stabilized units by a fractional exponent based on the cost the landlord/ property owner paid on improvements made to the apartment.
The properties impacted by the unlawful enterprise were located either in Upper Manhattan or in two sections of Brooklyn, Brighton Beach and Flatbush.
The new law passed three years ago, according to New York City’s Office of Rent Administration, Homes and Community Renewal division, significantly limits the options landlords and property owners raise on rent-stabilized apartments.
Previously, as fraudulently used in this case, improvements made to units could yield an increase of “2.5% in buildings with less than 35 apartments and 1.67% in buildings with more than 35 apartments. The new law reduced these percentages to 0.6% and 0.55%,” according to Nest Apple, a trade blog created to inform buyers and sellers within New York’s real estate market.
James addressed how the scheme impacts the state’s desire to protect its citizens, many on fixed incomes and living close to the poverty line, “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.”
“Newcastle and Highcastle made themselves millionaires while kicking hundreds of rent-stabilized apartments off the market.”
According to the Office of the Attorney General, the owners of the over two dozen buildings employed Newcastle and Highcastle to help them cheat the system by falsifying the costs of IAIs encouraging them, or turning a blind eye to the allocation of construction expenses in apartments, inflating the costs for renovation jobs and taking kickbacks.
One example provided to explain the drastic measures Newcastle and Highcastle made to get units deregulated examines two apartment buildings in the same building needing the same repairs or renovations.
However, based on the deregulation threshold, one needed $38,000 in IAIs and the other needed $52,500 to get the break for the increase in rent for the owner or landlord. The companies, despite both units getting the same services from the same contractors, billed it in the amount needed ($38,000 and $52,500, respectively) to meet their targets.
The Office of the Attorney General’s also said workers would also charge a little extra (if a job was $25,000, they would charge $30,000 and keep the extra $5,000 for themselves), for their own pockets.
Outside of the over $1 million in kickbacks from contractors hired to do this work, Newcastle and Highcastle also hid bribes.
The $4 million will go to Attorney General James’ Affordable Housing Fund with the New York City Department of Housing Preservation and Development (HPD), an account set aside to preserve and expand affordable housing in New York City.
The landlords and property owners will now have to hire an independent auditor to comb through the regulated status and legal regulated rents of the units Newcastle and Highcastle previously managed.
Once the auditor’s evaluation is complete, the property owners and landlords will be mandated to follow protocols set forth by OAG to reset legal rents, offer rent-stabilized leases, and refund current tenants for overcharges, if applicable.
The last contingency of the settlement requires the property owners and landlords to implement new “institutional practices to ensure legally compliant ownership and management of rent-regulated apartments.”