A.G. Sues Property Manager Over Illegal Deregulation Scheme

Attorney General Letitia James recently announced a lawsuit against a New York City property manager and his company for fraud, unjust enrichment, and repeatedly violating rent stabilization laws through manipulation of individual apartment improvements (IAIs). The manager worked for many years at a property management company that manages approximately 2,500 apartments throughout New York City.

The complaint alleges that the management company implemented a strategy to gut-renovate vacant rent-stabilized apartments, count the cost of the renovations as IAIs, and then claim that the apartments were exempt from rent stabilization when a new tenant moved in. It’s alleged that, in order to carry out this plan, the manager, without speaking to any contractor, first determined how much money it would take to deregulate a unit, and then dictated the labor cost to the captured contractor regardless of the true and fair cost of the renovation. Further, he used false change orders when his calculation fell short. This practice resulted in discrepancies in the claimed cost of labor.

For example, $14,500 would be claimed in construction costs to renovate a one-bedroom apartment; whereas, $95,000 would be claimed in construction costs to renovate a studio in the very same building at the same time. The manager assigned these labor costs to apartments based exclusively on the amount of IAI necessary to deregulate each unit and not the actual value of the work. However, because the manager created checklists and other paperwork to make these costs appear legitimate, it was virtually impossible for the DHCR or incoming tenants to uncover the fraud.

Additionally, the complaint alleges that the manager secretly siphoned money from payments to contractors, and he included those kickbacks in claimed IAIs. Contractors paid the manager in cash and checks, and the manager and his associate together took more than $1.2 million from the contractors hired to renovations. Some contractors paid the manager and his associate directly, and others paid for their expenses, such as country club dues, Porsche payments, and home improvement projects.

“Engaging in fraud with respect to renovations is a decades-old, devious practice designed to take advantage of tenants throughout New York,” said Attorney General James in a statement. The Attorney General, in coordination with the DHCR, is continuing its investigation into the loss of rent-stabilized apartments through the scheme. The matter is being handled for the Attorney General’s Real Estate Finance Bureau by Senior Enforcement Counsel Rachel Hannaford, Assistant Attorney General Ryan Goodland, Chief of Enforcement Louis Solomon, and Bureau Chief Brent Meltzer. The Real Estate Finance Bureau is overseen by Chief Deputy Attorney General for Social Justice Meghan Faux.