Adam Leitman Bailey, P.C. Uncovers Red Flags During Rent Regulatory Due Diligence Causing Investor to Look Away from the Deal

By Carolyn Z. Rualo

With only days left in 2015 and a due diligence period negotiated to end 14 days into the New Year, a proficient real estate investor looked to Adam Leitman Bailey, P.C., to investigate the regulatory status of 201 units spread over 9 buildings in Manhattan and Brooklyn.  While most of Manhattan business was on holiday hiatus, the lawyers here immediately began reviewing the buildings’ records with the New York City Department of Building, Housing Preservation and Development and the New York State Division of Housing and Community Renewal and any documents that were publicly available, or otherwise immediately available, while waiting for the Seller to provide access to their tenant files.

Ultimately, access to the Seller’s files was not provided until four days before due diligence was to end.  But our client, the purchaser, did not lose time waiting for the Seller to come around.  As soon as we learned about the tight time frame, we pulled together a team of attorneys and support staff, who carefully reprioritized responsibilities and commitments to meet our client’s due diligence needs on this deal.  Experience told us the only way to thoroughly confirm and report on the regulatory status of each of the units, with only four days left in due diligence, is to devise two teams of lawyers and support staff.

Team A reviewed, one by one, each tenant file at the Seller’s office while Team B worked to provide Team A with specific directions as to what to look for in the tenant files and what to ask the Seller’s agent, if the agent is willing to talk.  Simultaneously, Team B, as it acquires the intelligence gathered from the public records AND tenant file review, prepared a formal, detailed written report that our client can easily and quickly digest, and potentially share with investment partners.

Our review of the buildings revealed poor management practices that expose future owners to a substantial decrease in the buildings’ rental income because the high legal regulated rents reported by the seller were not substantiated by the leases we found in the tenant files.  Equally as alarming is the ever changing face of the rent stabilization law which, as relevant here, most recently took pace on April 28, 2015, when the First Department in Altman v. 285 W. Fourth LLC, held that although a landlord was entitled to a vacancy increase after the departure of a rent stabilized tenant, that increase could not effectively deregulate an apartment if the rent at the time the tenant vacated did not exceed the relevant high rent vacancy deregulation threshold.

Therefore, our due diligence review included an analysis of each of the 201 units in light of the Altman doctrine.  Other issues revealed in our analysis are of relatively lesser concern but collectively caused our client to look away from the deal at least for the time being or until a better purchase price is negotiated.

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Carolyn Z. Rualo

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