$4M recovered after AG Letitia James uncovers kickback scheme
Buildings were in Flatbush, Brighton Beach; Costs inflated to decontrol apartments
New York State Attorney General Letitia James on Tuesday announced she has secured $4 million from a group of 29 New York City landlords after uncovering an illegal kickback scheme by the management companies they employed to deregulate hundreds of rent-stabilized apartments in New York City.
The Office of the Attorney General (OAG) reached a settlement with 29 LLCs (the owners) affiliated with Sentinel Real Estate Corporation for wrongdoing committed by employees at the now-defunct property management firms the owners used: Newcastle Realty Services, LLC (Newcastle) and Highcastle Management, LLC (Highcastle).
Most of the buildings were either in Upper Manhattan or in Brooklyn, mainly in Flatbush and Brighton Beach.
Newcastle and Highcastle inflated and falsely stated renovation costs for rent-stabilized apartments in an attempt to deregulate them, and their employees accepted more than $1 million in kickbacks from contractors in exchange for hiring them on renovation jobs.
Brooklyn owners involved in the settlement are:
- 3100 Brighton Second St. LLC, Brighton Beach
- Brightwater 219 LLC, Brighton Beach
- Brightwater 231 LLC, Brighton Beach
- 79 Brighton 11th St. LLC, Brighton Beach
- 125 Brighton 11th St. LLC, Brighton Beach
- 1511-1425 Brightwater Ave. LLC, Brighton Beach
- 120 E. 19th St. GSA I, LLC, Flatbush
- 146 E. 19th St. LLC, Flatbush
- 165 E. 19th St. GSA I, LLC, Flatbush
- 287 E. 17th St LLC, Flatbush
- 1803 Beverly Road LLC, Flatbush
- 1115 Union Apartments LP, Crown Heights
“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,” said Attorney General James. “Newcastle and Highcastle made themselves millionaires while kicking hundreds of rent-stabilized apartments off the market.”
Prior to June of 2019, if owners made improvements to rent-stabilized units, they could increase the rent of those units by a fraction of the cost of the improvements that were made, through a system known as Individual Apartment Improvements (IAIs).
Some property owners and landlords used IAIs to increase rents enough to bring them over the deregulation threshold established by those laws, thereby converting them to market-rate units and maximizing the buildings’ market values, according to the Attorney General’s Office.
The owners involved in this settlement utilized a similar investment strategy, and Newcastle and Highcastle helped them carry it out by falsifying the costs of IAIs. Newcastle and Highcastle allocated construction expenses among units to achieve deregulation, inflated costs for renovation jobs, and included the kickbacks they received from contractors in the charges reported for certain units, the Attorney General’s Office said.
As part of their scheme, Newcastle and Highcastle would intentionally set the cost of labor for a renovation project to be equivalent to the amount necessary to deregulate that particular unit, regardless of the quote provided by the contractor.
For example, an apartment in one building required $38,000 in IAIs to get over the deregulation threshold, while another apartment in the same building required $52,500 to deregulate. Both units received nearly identical renovations, but Newcastle and Highcastle reported the renovation expenses at $52,500 and $38,000, respectively, so they could deregulate the units and rent them at the market rate.
In exchange for awarding repeated renovations jobs to certain contractors, Newcastle and Highcastle employees received more than $1 million in kickbacks from contractors in exchange for being awarded jobs at the owners’ buildings.
They hid these bribes by reporting the amount as included in the amount spent on IAIs: If labor costs for a job were $45,000 and the employees received $5,000 as a kickback, they reported the renovation investment in the unit as $50,000, the Attorney General’s Office said.
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