[What you need to know to start the day: Get New York Today in your inbox.]

When a contractor was hired in 2012 to renovate nine rent-regulated apartments at a prewar, six-story building in the Washington Heights neighborhood of Manhattan, the renovations were identical across all of the units — new hardwood floors, new countertops, new appliances — but the prices were not.

The real estate firm that hired the contractor calculated how much was needed to spend on improvements to push the rent beyond the threshold to deregulate the apartments, instead of budgeting for the true costs of the renovations. For example, the firm paid the contractor $95,000 in labor costs to gut-renovate a studio apartment, while paying only $14,500 to do similar renovations on a one-bedroom.

It was all part of a real estate scheme designed to jack up rents and illegally lift hundreds of apartments out of rent regulation in New York City, according to a lawsuit filed by the state attorney’s general office on Thursday.

Landlords can deregulate apartments when the rent passes a certain threshold — currently $2,744.77 a month.

Employees of Newcastle Realty Services, a Manhattan real estate investment firm, made up prices for renovations, lied about specific repairs, and forged documents, abusing a provision in state law that enables landlords to raise rents when they renovate rent-regulated apartments, the suit said.

Along the way, contractors paid more than $1.2 million in kickbacks to two employees at the firm, including cash and checks to cover splashy expenses like country club dues and a loan on a Porsche.

The goal was to systematically push the rents of regulated apartments in Manhattan and Brooklyn past the threshold that deregulates the apartments, thrusting them into the more lucrative free market.

“Engaging in fraud with respect to renovations is a decades-old, devious practice designed to take advantage of tenants throughout New York,” Letitia James, the attorney general, said in a statement. “Knocking hundreds of rent-stabilized apartments off the market by illegal schemes is immoral and unacceptable.”

In the past few decades, New York has lost tens of thousands of rent-regulated apartments, the city’s largest stock of affordable housing, for which monthly rents increase by only a small percentage each year.

Abuses are rarely exposed, but advocates say they are rampant — claiming that unscrupulous landlords routinely game the system in an attempt to deregulate apartments and raise rents. The issue will be front and center when New York state’s rent laws expire next month; lawmakers are poised to make tenant-friendly reforms, and legislators are considering eliminating the exact provision that the lawsuit claims was abused by Newcastle employees.

The suit accused David Drumheller, the former head of operations at Newcastle Realty Services, of engaging in a price-fixing scheme to deregulate hundreds of apartments managed by the firm from 2012 until 2016.

Contractors who benefited from the renovations paid kickbacks to Mr. Drumheller and another unnamed employee, according to the suit.

“We intend to fight this lawsuit and prove that all actions taken were lawful and appropriate.” said Roger Stavis, a lawyer for Mr. Drumheller, who is currently the director of operations at GFB Management, a real estate operator that also manages affordable housing, according to his LinkedIn profile.

Newcastle Realty Services, which the lawsuit said manages about 2,500 apartments in the city, is not a defendant, but the lawsuit detailed how other employees at the company were also involved in the ploy.

“Newcastle has been cooperating with the attorney general for over a year,” Ronn Torossian, a spokesman for Newcastle Realty Services, said. “Mr. Drumheller was terminated by Newcastle years ago for inappropriate conduct unrelated to this matter.”

He said the unnamed employee was fired after the attorney general’s office disclosed the wrongdoing.

A landlord is allowed to renovate an apartment and pass on a portion of the costs in the form of a rent increase under a provision known as Individual Apartment Improvements, or I.A.I.s.

Building owners have said that I.A.I.s are one of the few incentives they have to make repairs and keep their apartments in livable conditions, and that abolishing the provision would deteriorate the conditions of the city’s housing stock.

But the lawsuit offered a detailed look at how landlords can recklessly exploit a system known for its lax oversight to turn a profit and circumvent regulations meant to keep apartments affordable.

The suit said Newcastle Realty Services is among the investors that “make it a business practice to target rent-stabilized properties with low rents” and deregulate the units to collect higher rents or sell the buildings for a profit.

Newcastle Realty Services used just a handful of contractors, and Mr. Drumheller would work out how much the company needed to spend on renovations to push the rent beyond the threshold to deregulate the apartment, instead of budgeting for the true costs of the renovations, the suit said.

Mr. Drumheller and other employees would dictate to contractors the prices the company was going to pay for renovations “without any competitive bidding or relation to the actual cost of the labor,” the suit said.

In August 2012, Mr. Drumheller claimed the labor cost to renovate a one-bedroom apartment in Crown Heights, Brooklyn was to be $52,500. Newcastle gave the job to a contractor that in reality needed significantly less to cover its expenses for the job, the suit said.

But the contractor took the money and the inflated renovation costs helped to successfully push the apartment’s rent to $2,512.01 — about $12 above the deregulation threshold at the time, the suit said.

To legitimize the phony numbers, Newcastle employees often prepared invoices and job proposals on behalf of contractors using contractor letterhead, and Mr. Drumheller submitted these to regulatory agencies, the lawsuit said.

According to the suit, contractors paid kickbacks in exchange for being awarded the lucrative renovation jobs. Two contractors, OVQ Consolidated and KKA Consolidated, paid Mr. Drumheller at least $527,000 in kickbacks between 2014 and 2017, the suit said.

The unnamed employee regularly met with a window contractor at his van outside Newcastle’s offices to receive cash payments, the suit said; the contractor also paid the employee’s thousands of dollars in dues at the Elmwood Country Club in Westchester County.

In November 2015, one contractor wrote a check for more than $20,000 to Porsche Financial Services to pay off the unnamed employee’s loan on a sports car, according to court documents.

Mr. Drumheller, the suit said, worked to conceal the kickback portion of the scheme from Newcastle Realty Services. His former employer, however, has been on the state attorney general office’s radar before.

Several years ago, Newcastle tried to improperly convert an Upper West Side rental building into a condominium and illegally induced tenants to leave the building through buyout agreements, the office found in 2015.

As a result, Newcastle was forced to pay more than $1.5 million in fines and legal fees, and agreed to waive two years of rent for the 11 tenants who stayed put.

The lawsuit against Mr. Drumheller seeks, in part, to prohibit him from engaging in any business related to rent-stabilized apartments and to compensate tenants who were affected.

Ms. James said her office will work to re-regulate lost units. Tenants who believe they were overcharged can file a complaint with the state.

Luis Ferré-Sadurní writes about housing in New York City for the Metro Desk. He joined The Times in 2017 and is originally from San Juan, Puerto Rico. @luisferre

Source: Read Full Article