As you may have heard, the appellate court earlier this month ruled that New York City residential buildings receiving J-51 tax benefits can not convert rent-stabilized apartments into market-rate units under the city's luxury decontrol laws under any circumstances. Further, it ruled that landlords that have done so in the past, must return the rent gains to current and former tenants.

To understand the repurcussions of this decision, you first have to understand that the J-51 tax benefits are, what they say and what they mean. If I had all the answers, I'd be very rich and influential, but I'll take a shot at making sense of it.

To put it simply, J-51 tax benefits provide tax breaks to landlords who renovate existing rental apartments. In exchange for receiving these benefits, landlords must subject the units in their buildings to rent stabilization. They may not destabilize these units until the tax benefits expire. Now . . . here's the catch. Many of the buildings that receive J-51 tax benefits already were stabilized before the landlords received the benefit.

The question is, can these units be deregulated, since they were already stabilized when the J-51 tax benefits took effect?

To answer this question, the judges went back to the rent stabilization law, which says that units are exempt from luxury decontrol if they "become" rent stabilized "by virute of" receiving J-51 tax benefits. So, the new question is, does "by virtue of" mean "solely by virtue of" - meaning that pre J-51 stabilized apts. could be destabilized or does it mean "in-part by virtue of" - meaning that no stabilized apts could be destabilized?

For what it's worth, wiktionary defines "by virtue of" as "because of; on the grounds of; by reason of; due to; based on." Based on this, it would seem to me, that only units stabilized as a result of the J-51, are restricted from destabilization. As attorney Stephen Meister (who filed an Amicus Curiae brief on behalf of the Real Estate Board of NY) notes, the fact that the law says "become" stabilized further points to the fact that the restriction on luxury decontrol does not pertain to existing stabilized buildings. Any lawyers I've asked about this, as well as the Supreme Court of NY County (based on the 2007 decision) and the DHCR (Department of Housing & Community Renewal) agree. However, this decision was overturned by the latest verdict of the appellate court. Of course, Tishman Speyer is appealing and has already been granted a stay.

So, what does this all mean to NYC real estate?

In my opinion, if the opinion of the appellate court is not overturned, it will be a horrible blow for NYC real estate. First, many landlords will have to return billions of dollars in rent overpayments to tenants and past tenants in nearly 80,000 units. Second, many of those same landlords will default on their loans, loans that were underwritten based on the successful deregulation of stabilized apartments. With landlords defaulting left and right already, this is big trouble for NYC real estate and the NYC economy.

Many of you may say, well, what about the poor lower and middle income tenants that the appellate court's interpretation of this law protects? To that I say, read my last blog post! This ruling only protects tenants who make $175,000 per year or more, who live in stabilized apartments. I can't say that I feel sorry for these "lower and middle class" people. The fact of the matter is, living in Manhattan, or NYC for the matter is not an entitlement.